Last week saw one of the most volatile stock markets in recent memory. The problem resulted from mortgage woes created by the sub-prime lending market.

While the stock market calmed down after an influx of billions of dollars the problem regretfully has only just begun. Sub-prime lenders put thousands of borrowers in homes they simply could not afford and will be unable to maintain.

Most of these homeowners were maxed out with payments at the onset of the loan and with the rising adjustable mortgage rates increasing monthly mortgage cost the home owners that were already in over their heads are starting to get in real trouble now.

To add fuel to the fire many of these homes were purchased in a frenzied sellers market and paid entirely too much going in an effort to hedge inflation. Now they find themselves in a “Buyers” market with pricing declining to the point they have lost what little equity they had months ago.

Refinancing is not a viable option to these “Stressed Homeowners”. Unfortunately in many former “Hot Markets” like Las Vegas Nevada, Florida and Southern California were appreciation reached unsustainable levels in recent years, homeowners now find themselves in a negative equity position. For example a homeowner in Las Vegas with a $380,000 mortgage now has a home that will be hard pressed to appraise for $300,000. That by itself leaves an $80,000 deficit. Conventional loans once again require 10-20% down. So in order for this “Stressed Homeowner” to refinance his home he must come up with a minimum of $110,000 to $140,000. Now keep in mind that sub-prime loans were created for homeowners with bad or little credit and were maxed out with payments from the onset of the original loan.

All of this combined with the fact that we have still not reached the 5 year mark of this most recent “Boom” of 2002-2003 when the ARMs mature in late 2007 and 2008 makes for a recipe for disaster in the coming year.

This pending train wreck for the real estate industry is almost unavoidable. President Bush correctly dismissed the possibility of a federal bailout bail out last week. It is NOT the responsibility of the federal government to protect consumers from bad choices. Without a doubt we will see record foreclosures unfortunately and we will see price adjustments downward in most markets.

While we have not seen the unsustainable appreciation levels in Missouri as witnessed in these so called “Hot” markets we still have a problem with consumer confidence here in the “Show Me” state. Potential buyers are inundated with all the bad press about the “Real Estate Bubble” busting and are not aware of the fact that Missouri lenders did not participate that much in the sub-prime market nor did the homes in Missouri see double digit appreciation annually. In other words there really is NO “Real Estate Bubble” in Missouri.  Just confused buyers.

As I have covered in many public forums and blogs the trend of sub-prime mortgages have led to many home buyers being in arrears and facing or have faced foreclosure.

Sub-Prime loans are for home buyers with poor credit, bad employment records or little or no money down. While sub-prime loans have enabled many buyers that would otherwise be unable to purchase a home it has come at a great price to the industry.

While sub-prime loans have not been as prevalent in the Missouri real estate market as it has been in so called “Hot Markets” like Las Vegas or San Diego we have still felt the sting of these loans failing simply by all the associated negative press creating a lack of confidence in Missouri home buyers.

If a potential home buyer would investigate the cause of these record foreclosures nationwide they would quickly determine that these transactions should have never taken place to begin with. Conventional mortgage loans in Missouri seldom go into foreclosure and real estate consistently shows a steady appreciation rate.

So if you are a potential home buyer, sit down with your loan officer and determine home much home you can afford. Separate your “Needs” from your “Wants” and get pre-qualified for a mortgage on a home you can enjoy and afford.

~Rhonda McMillan

Broker