Mortgage crisis has had little effect here

Both print and on-air media have given a lot of attention lately to the woes of subprime mortgage lenders and borrowers. The crisis is blamed for the bottom dropping out of the stock market as the Dow Jones Industrial Average has fallen sharply in the last two weeks, and credit markets have tightened worldwide.

Holders of mutual funds have seen their share value decrease appreciably and the housing sales slump continues across the country. Predictions estimate it will take another year before the housing market starts to recover.

Countrywide Financial, the nation's number one mortgage lender and a big player in the subprime mortgage market, is teetering on the brink of bankruptcy. As a result, Countrywide has toughened its lending standards, a sign that it will be harder for many people to qualify for a home loan.

Subprime lending/borrowing

A subprime mortgage lender lends money to borrowers who do not qualify for mainstream or prime loans. Many subprime lenders are independent companies but others are mainstream lenders who either offer both prime and subprime loans or are affiliated with subprime lending companies.

A subprime borrower is a person who has a credit score too low to qualify for a prime loan. A low credit score always disqualifies a borrower. A middle of the road credit score may or may not disqualify a borrower depending on other factors such as the amount of down payment and debt to income ratio.

Because subprime lenders are taking more risks, rates are higher than prime mortgage lenders. The lower a person's credit score and down payment, the higher the interest rate on the loan.

More subprime than prime loans default, so costs are higher. Subprime loans often have a penalty for prepayment, and escrow accounts for mortgage insurance and taxes are not always required.

Many subprime loans are ARMs or Adjustable Rate Mortgages, offering low interest rates for a term of 2 to 5 years that increase at the end of the term. The increase is based on the current interest rate index plus a built-in margin for the subprime lender.

The margin is often as high as 6%. That means that even if interest rates remain unchanged by the end of the term, the lender's margin causes monthly payments to increase substantially.

A typical loan that subprime lenders sell is called a 2/28 loan. The loan offers a low interest rate for the first two years. After two years the loan adjusts higher based on current interest rates plus the lender's margin.

The borrower is told they can rebuild their credit rating during the first two years and refinance before the loan adjusts upward. But when housing prices are depressed, as they have been since the middle of last year, banks won't refinance because the borrower has not built up any equity.

Often, borrowers are stuck with a loan that exceeds the current value of their house, which they now can't sell.

Subprime lenders claim that they allow people to purchase homes who would otherwise be unable to do so. But some subprime lenders use predatory tactics, purposely targeting lower income neighborhoods and lending to borrowers they know can never repay the loan.

The result is foreclosure and seizure of property by the lender.

The current housing slump started midyear of 2006. Home prices have dropped and the supply of houses on the market has increased.

Many 2/28 loans made in 2005 are coming to term and many subprime borrowers are defaulting, or are expected to default. The Wall Street Journal reported this week that 56% of all subprime loans are 2/28 loans.

Subprime lenders may foreclose and seize properties, but they are now unable to sell at a profit.

Effect on Morgan County

The good news is that there are no subprime lenders at work in Morgan County. This is not to say there are no subprime mortgages because some subprime lenders have a presence in nearby cities and on the internet.

"There has been very little effect on acquiring financing for people," Broker Connie Perry of Perry Realty said. Perry said she only knew of two foreclosures due to subprime loans in the county.

"A lot of people go online to find a mortgage lender," Perry said.

Perry, who has been selling real estate in the county for 35 years, recommends that you go to your local banks for financing.

Phil Kesecker, owner of J. Phillip Kesecker, Inc. and a developer and realtor in the county for 51 years, calls subprime mortgages "Mickey Mouse" loans. Kesecker points out banks are regulated much closer than mortgage companies.

A canvass of local banks turned up no loan defaults or foreclosures.

"I have not heard anything that would indicate that Morgan County is affected by subprime lending. I don't think it will have a major effect here," President and CEO of CNB Thomas Rokisky said.

Rokisky said the bank didn't need to tighten standards or raise rates due to the subprime lending crisis and has maintained the same standards all along.

"I feel very comfortable with our portfolio," Rokisky said.

Rokisky offered some advice to borrowers who think they may have a problem making loan payments. Contact your lender, go in, sit down, talk to your banker and try to work things out before a problem gets out of hand.

"We will work with anyone," Rokisky said.

"Banks are very conservative and have to adhere to underwriting guidelines of the Federal government. We have never gone out of our realm of comfort, have been steadfast and prudent and have maintained the same standards," Eastern Panhandle Regional President for City National Bank, Becky Linton said.

Denise Bergen, Assistant Vice President of BB&T, said she hasn't seen any loan defaults yet. Bergen said that BB&T's standards haven't changed.

"Good banks keep debt to income ratios at a certain level," Bergen said.

Bergen did say that home appraisals are coming in lower. Since fewer homes are selling, appraisers have little to compare a home against.

If appraisals are lower, does that mean home assessments will come down?

That question was asked of Morgan County Tax Assessor John Allen Swaim.

"When sales show that home values are coming down, assessments will go down. We haven't seen it yet," Swaim said. Swaim went on to say that they are still behind in getting assessed values up to where they should be.

County real estate market

Ben Fox, an agent with Century 21, said that he is busier this year than he was at this time last year.

"People realize it is a buyer's market. It is not as bad as it seems. Sales are better than last year but not as good as in 2005," Fox said.

"Things are starting to pick up a little bit," Sandra Stotler, agent/owner of Berkeley Realty Group said.

"Prices have to come on down. There is a lot of supply out there," Stotler said. She noted that there are approximately 365 homes on the market in Morgan County.

Sellers are waiting 6 – 12 months for a house to sell instead of the 3 – 4 months it took several years ago, Stotler said.

"Sellers and buyers just haven't adjusted to the market yet," agent Gina Wood of Home Team Realty said.

"There is still a market if you can keep the price down," Realtor Ron Anderson of Long and Foster said. Anderson said that more homes are selling in the $100,000 to $200,000 price range than in the $200,000 to $300,000 range.

"People that can afford a nice second home are still buying," Anderson said.

About the subprime lending crisis Anderson said, "A lot of lenders got greedy and made bad loans."

Roger Salen, President of MDG Companies of West Virginia and developer of Cacapon East and Cacapon South said that lot sales and traffic are down. MDG sells land for vacation and retirement homes.

Out of 31 lots in Cacapon South Section V, a new section that opened in March 2006, only 18 lots have sold.

"It was a good year up to June of 2006," Salen said.

Salen believes that if the stock market continues its volatility, investors will start looking for safer places for their money, and land sales should pick up.

Kesecker doesn't feel the real estate market will recover until 2009.

"The market is slow but not dead," Kesecker said.