Are subprime loans making a comeback?

Subprime loans make it possible for many homeowners to qualify for a mortgage and buy a home. In 2005, subprime loans also triggered a housing bubble that we are still feeling the effects of for nearly the last decade.

Subprime loans are made to borrowers who are highest risk: either they don't have a good income history, little or no down payment, or their credit scores are bad.

The housing boom and the bursting bubble

In 2005, Wall Street investors were anxious to securitize subprime loans in hopes of a big return on their investment. This encouraged lenders to push high-risk loans. The assumption was that loans would be refinanced and the prices of homes would rise.

What happened was that eventually, home prices dropped, there were massive foreclosures and investors lost billions in the housing market. The bursting bubble was severe enough to help take down investment giants Bears Stearns and Lehman Brothers, just to name a couple.

The current subprime situation

Currently, subprime lending is a fraction of the total market. In the first nine months of 2013, about $3 billion of subprime mortgages were made compared to $625 billion made in 2005.

Tougher federal lending standards in the last couple of years means millions of Americans with poor credit scores have been unable to secure traditional mortgages. Lenders who operate in the new subprime space have an opportunity not only to help renters become buyers, but turn a big profit as well.

Lenders who offer subprime mortgages are much more careful. They require as much as 30% down to safeguard their investment. They have to hold onto their loans for a while or sell them to private equity firms until they establish a strong enough track record to offer mortgage-backed securities to investors.

Burned by the last bubble, investors are taking a pass on subprime for now. For the time being anyway, buyers who pose the biggest risk will have to rely on the Federal Housing Administration for mortgage loans until the new subprime lenders establish themselves as safe investment opportunities for investors.

Questions you should ask before choosing a REALTOR®

When it comes time to sell your home, choosing the right real estate agent can mean the difference between selling your home quickly and seeing it sit on the market for a while; between getting your asking price and selling well under your target; between a stressful and a stress-free experience.

During the time your house is on the market, you’ll probably spend quite a bit of time with your agent. Their style should be compatible with yours. If you’re a type A personality, choose a go-getter. If you prefer a more relaxed approach, you’ll probably be happier with a REALTOR® who’s more laid back. You are going to be spending a lot of time with your agent, so your agent's style should be compatible with yours.

Are you a member of the National Association of Realtors?

The NAR requires ethics training and strict adherence to their code of ethics.

What percentage of your clients are buyers vs. sellers?

Can you outline how you would represent us?

Listen for information about housing inspections, following through with your mortgage approval process, and being present at your closing.

In which neighborhoods do you primarily work?

If they don’t work in your area much, it might be worthwhile to keep looking.

How do you plan to advertise my house?

You should have realistic expectations. An agent isn't going to spend half of their commission on marketing for your home.

What is a realistic time frame to sell my house at my list price?

If it sounds too good to be true, it probably is. You don’t want to be lied to here; you want to be presented with realistic expectations.

Will I be working with you directly or handed off to someone else?

In many instances, the REALTOR® gets the commitment, then farms out the work to a sales associate or administrative assistant and you never hear from him again. They’re more interested in getting the next listing and letting someone else sell the property while they collect 3%. That’s not what you should be looking for.

Do you work full-time or part-time as a real estate agent?

A lot of great agents work part-time and are very successful.

How many homes have you closed in the last year?

A small number isn’t necessarily a deal breaker. Be realistic. If it sounds low, ask why.

How many other buyers and sellers are you representing now?

The busiest agents often are the most efficient, but if they have 100 people they’re working with, they’re not committing a lot of time to your business.

Is your license in good standing?

Make sure to check the agent’s certification with the state's Department of Real Estate. Many states provide this information online.

How many years of experience and education do you have?

Years of experience is a good indicator of their level of commitment and talent. Those agents who make the effort to continue their education are usually better agents.

Do you work on weekends?

Answer to this better be yes.

Can you provide me references?

Insights from past customers can help you learn more about an agent and give you a greater comfort level.

The best strategy when picking a real estate agent is to choose the most qualified person, and the one with whom you think you'll work well. Ideally, you want to partner with an experienced agent who knows your market, has a strong sense of ethics, answers your questions and, most importantly, listens to you and addresses your concerns throughout the process.

Liens: What they are and what to do if one is placed on your home

A lien occurs when a legal claim is put on a property in order to receive payment for debt or for services rendered. The holder of the lien can sell the property in order to recover the money owed.

A lien can be placed on assets almost any time you have an unpaid debt. A creditor files a lien in the county office stating that they have an interest in your property. It basically gives the creditor a financial stake in your home.

A lien will prevent you from being able to sell, mortgage or take a home equity loan on your home until the lien is lifted. Although there are a number of different types of liens that creditors may place on your home, there are three that are most common.

Mechanic's lien

When a general contractor builds your home, they will very likely file a mechanic's lien on the property to ensure they get paid for their work. Subcontractors and repairmen - including plumbers, painters and carpenters – may also file a mechanic’s lien if they aren’t paid.

Judgment lien

If you’re involved in a lawsuit and you lose, the winning party of the lawsuite can file a judgment lien against your home until the payment is collected. This type of lien can also be imposed by an attorney if you do not pay for legal services.

Tax lien

If you don’t pay your taxes, the government entity – be it federal, state, or county - can file a tax lien on your home until the tax bill is paid.

What to do if someone files a lien

Simply put, the best way to get a lien removed against your home is to pay the bill, settle the lawsuit or pay the taxes. You can negotiate with the lien holder to have them voluntarily remove the lien. It is in your best interest to have any lien against your home removed as quickly as possible.

If the lien is unjustified, you can ask the court to remove the lien.

To ensure that there is never a lien on your home, make sure you pay your creditors and taxes on time and in full. Don’t avoid the situation if you have mounting debt or can’t pay your bills. Consult an attorney or financial advisor to get some help.

What are housing starts and why should you care?

Just last week, government issued the housing starts report for December and it was pretty good news. If you listen to talk radio or watch any financial news program on cable, one day a month they talk about housing starts and then you don’t hear much about it. The problem is that nobody bothers to tell you exactly what the term means and why it’s important.

The federal government tracks housing starts and issues the information, usually in the third week of the month. These statistics come from the Census Bureau, which is part of the Department of Commerce and from the Department of Housing and Urban Development (HUD).

The government reports the number of scheduled construction projects of new houses or apartment buildings across the country. That’s housing starts, in a nutshell. Like unemployment rates, economic growth, and consumer confidence statistics, it is used as an indicator of how the economy is doing.

The ripple effects on the economy

The housing market is one of the most vital aspects of the U.S. economy. Many analysts believe that there may be no better indication of how the housing market is doing than housing starts.

If a report comes out showing that housing starts are up, it's a good sign for the economy. There are usually ripple effects in the stock market as consumers invest, which increases the value of stocks and corporate profits. If the report says housing starts are down, investors tend to get tight-fisted.

Housing starts are an indicator of the commitment of builders to new construction. When new construction is up, more people will be employed to build those houses and apartment buildings. It also means that the people who buy those homes or move into a new apartment will be purchasing big ticket items such as furniture and appliances. These are often referred to as durable goods and are yet another economic statistic you may hear reported.

How to look at housing starts

Because construction is seasonal and subject to weather, housing start numbers tend to be volatile. One down month doesn’t mean you should take it as an indication that the economy is tanking. To identify a trend, look at a six-month period of housing starts to get a more accurate indication of what the market is doing. You should also do a year-over-year comparison.

Remember also that we’re dealing with government numbers here. Like every other report it issues, housing start figures are subject to revisions up or down. Those revisions come out within two months of the original report and are very rarely reported in the news. The change can be significant.

How to pay off your mortgage earlier

If you listen to any financial guru on talk radio or see them on financial shows on cable news, almost all will generally advise homeowners to pay off their mortgages early, if possible. How much you save depends on the amount of your mortgage, the length of time you pay and your interest rate.

The advisors put forth many strategies to accomplish the goal of paying off the house. Really, it all boils down to one thing: paying extra money up-front to save you money in the long run.

Refinancing isn’t the only option

Occasionally, lenders will offer refinancing programs in order to drop your interest rate. This means that your monthly payment will be less, of course. However, unless it specifically allows you to keep the length of your mortgage static, most of the time when you refinance, your mortgage will be 30 years. Again. If you can swing it, and if they offer it, look for mortgages that offer fewer years. The 15-year refi has been popular over the last couple of decades.

Pay more however and whenever you can

Most lenders will allow you to pay off your loan early without penalty. Any amount you pay extra on the mortgage payment comes right off the principal, which can greatly reduce the amount of interest you pay in the long run.

Here’s where the financial gurus get in a lather and offer all kinds of advice to accomplish your goal.

Round up your payment

Every month, pay your mortgage up to the next $100. If you can’t afford it month in and month out, round up to the next $50. Any money you pay extra comes off the principal.

Switch to biweekly payments

This requires a little more leeway in your budget. When you make biweekly payments, you are simply taking advantage of the fact that there are 52 weeks in the year and 12 months. When you pay half of your regular mortgage payment every two weeks, you will have made 26 half payments, or 13 full monthly payments, by the end of the year.

Pay extra when you have it

Keep in mind that you can make irregular payments and send any amount when you have it. When you get a tax refund, a bonus or any other type of windfall, apply it to your balance.

Take a look at what you’ll save

If you want to have some fun, go to a mortgage calculator and punch in some different options to see how much you’ll save.

Weird things can affect your credit score

Attaining and maintaining a good credit score is important because you could get a lower interest rate on your mortgage, potentially saving you tens of thousands of dollars over the life of your mortgage. In order to get the highest credit score possible we’ve all heard the typical advice for keeping good credit:

• Pay all of your bills on time


• Don't open a bunch of credit cards at once


• Don't file for bankruptcy unless absolutely necessary


• Keep an eye on your report to make sure everything is accurate

Those are the big things. But there are some little things... really strange things... that can add up when it comes to keeping your credit reports clean.

Getting cable or internet

There are some Internet and cable companies out there that will run a hard inquiry on your credit when you sign up for their service. A hard inquiry occurs almost any time you apply for credit - credit card, car loan or home loan, etc. A hard inquiry negatively impacts your credit score by a little bit. If you have too many hard inquiries at once, it can really ding your credit. The company has to have your permission in order to do this, so it shouldn't come as a surprise.

Using a debit card to rent a car

Most rental agencies require that the deposit be paid with a credit card. Some will agree to accept a debit card if you'll allow them to perform a credit check on you, resulting in... you guessed it... a hard inquiry.

Buying a new motorcycle

If you decide to buy a motorcycle, you should know this: Motorcycle loans are sometimes not reported to the credit bureaus as vehicle loans. Instead they are reported as revolving credit, which makes them look like a big chunk of uncollateralized credit card debt. Thirty percent of your FICO score is based on how much credit card debt you carry.

Unpaid tolls

Many toll booths in the country have switched to “toll by plate” systems where the vehicle has a tag in the windshield or on the license plate and the owner is sent a bill every month for toll road usage. Just like anything else, if you neglect to pay the bill on time, it’s reported.

Library fines

Although libraries don’t report directly to credit reporting agencies, many of them turn over unpaid balances to collection agencies, which do. Don’t let $4.00 in late fees ding your credit score.

Storage fees

There are a number of shows on TV depicting auctions of abandoned storage units. In addition to losing all of the stuff they had in those lockers, the delinquent owners have another thing in common: they all have a negative line on their credit report because the storage facility will turn over any remaining balance to a collection agency.

Financing furniture

Taking advantage of a 0% financing promotion at your local furniture store looks like a good opportunity to take advantage of free money. However, your credit could suffer because you’re adding a high balance loan to your credit report and could increase your credit utilization rate since the furniture loan is essentially maxed out.

Parking tickets

It doesn’t seem like a big deal, does it? An increasing number of cities are turning over unpaid parking tickets over to private collections agencies.

A collection action by any business can lower your credit score by up to 100 points or more when it shows up on your credit report. It can remain on your credit report for up to seven years, affecting your credit score for years to come.

Tax breaks expire for homeowners

If you keep a sharp eye out, you'll notice that you'll be paying more taxes soon - not this year, but next - if members of Congress don't act in 2014 to prevent it.

Which means you'll be paying more in taxes next year.

The good news for members of Congress is that they can say they didn't "raise" taxes; they only allowed several tax deductions that have been around for years to expire at midnight on December 31.

Private mortgage insurance premium deduction

If you put less than 20 percent down, chances are good that you're being charged PMI. It's used to protect the lender in case of default. It is usually a small percentage of the monthly payment, so most homeowners don't give it much thought. Over the course of 30 years, that small percentage can add up to thousands of dollars. Depending on your tax bracket, deducting it on your federal tax return can trim your cost by 20-35 percent.

Loan forgiveness

When a homeowner gets under water - owes more than the home is worth - they often use a tactic known as a short sale. The lender accepts what the home sells for in exchange for paid-in-full status. The difference between what was owed and what was made is considered taxable income. However, that tax had been waived for years. This could potentially cost a homeowner who does a short sale thousands of dollars at tax time.

Energy efficient tax credits

For the last few years, homeowners received credits for home improvements that increased the energy efficiency of their home. Those projects could include installing better doors and windows, insulation, furnaces, heat pumps, water heaters and central air conditioning. The credit for those will expire; however, some of the credits for installing solar water heaters, wind turbines, geothermal heat systems and other things will remain.

These three tax breaks will remain in effect for your 2013 return. There is always a chance that Congress will renew some or all of them, but it doesn't seem likely. Make sure to talk to your tax preparer.