The Mortgage Credit Crisis in Florida

More than 20 percent of all mortgages placed between 2004 and 2006 were subprime mortgages. Nearly one quarter of all American homeowners in recent years purchased homes using subprime mortgage programs. The majority of these programs have now been eliminated. In 2006 the subprime lenders begin to shut down and soon the subprime industry vanished leaving millions of potential homeowners with no chance of qualifying for mortgage financing.

In the previous mortgage era, a subprime borrower would purchase a home using a product like the 2/28 and be worry free. The real estate market guaranteed that he would have sufficient equity in his home to be able to refinance into a better mortgage. Mortgage lenders had become more accommodating. Who imagined that home prices would fall? Who thought that every subprime lender would hit the brakes simultaneously within a 90 day period of time?

A friend of mine went through a divorce in 2005 and his credit rating was hurt. He moved to Florida and was lucky to have enough money to be able to afford a 20 percent down payment on a new home. Because of his credit he was in a subprime category and elected to use a 2/28 for his financing. He felt reasonably secure. He was purchasing a home in beautiful south Florida. His mortgage was approved, and he had made a significant enough down payment to feel secure with his equity. 20 months later, four months remain before his mortgage rate will increase a full 2 percent. He figured that the timing was right to start planning his refinance.

He was shocked to learn home values on his neighborhood have fallen so much that his initial 20 percent equity is nearly gone. He no longer has enough cash to reduce his loan to 80% of the value, so he figured that he would have to refinance at a higher loan to value and just find a way to manage a higher rate than anticipated. He discovered that he could not obtain financing at all. The combination of his impaired credit, the lack of equity in his home, and the elimination of the subprime products, have now made it impossible for him to refinance.

There are millions of homeowners like my friend. If you are one of them, consult your mortgage broker now. There are new Fannie Mae programs that just might accommodate you.