Housing Woes? - If you think the recent subprime mortgage crisis is someone else’s bad news, think again. It might be hitting closer to home than you realize.

by Ingrid Case | Photo-Illustration by David McGlynn

These days, you can hardly open your newspaper or turn on the news without coming across a new twist on the subprime mortgage crisis. But even with this media blitz, how much do you really know about the subprime crisis and what it means for you, even if you’re a responsible homeowner who pays your bills every month?

This crisis caught many by surprise. Almost overnight, we went from a real estate boom in the late 1990s and early part of this decade to a time when houses sit on the market for months and years, some on their way to foreclosure.

So what happened? During the fury of the boom when buyers clamored to bid on properties that had barely hit the market, new lenders popped up and brought more competition to the lending market. In the race to woo new borrowers, some lenders began easing lending standards and expanding the writing of subprime mortgages—subprime, not because the rate was below prime, but because the mortgages were designed for people with marginal credit.

As interest rates climbed and home price increases slowed, many people with subprime loans had a hard time paying for or refinancing their mortgage.

While some think it’s old news, the fallout from the subprime crisis is still very real. It could be impacting your investments, your home value and your neighborhood in the years ahead. Read on to learn how the crisis could affect you.

How Can This Hurt You?
Even if you’ve dodged the main crisis, here are some ways it could still affect your life.

More Scrutiny—If you’re looking for a new home, it might be harder to get a mortgage, even if you have good credit. Lenders are going to spend more time reviewing your credit information than they may have a year ago, especially if your income varies from month to month or you’re looking for anything beyond a basic mortgage package.

Higher Rates—If your credit is less than stellar, you’ll find it even more difficult to find and afford a mortgage. “People with weaker credit, especially those in the middle of the road who were once considered eligible for the best rates, are going to see slightly higher rates,” says Jill Aleshire, director of consumer banking at Thrivent Financial Bank. “People with lower credit ratings may have trouble getting a loan at all.”

Market Glut—The housing market is suffering because there are too many homes for sale. With fewer and more expensive mortgages, it may be more difficult to sell a home. That’s especially true if your neighborhood has foreclosed properties. In this case, you have to be sure your house is priced to sell and has good curb appeal.

Shrinking Equity—If your home value starts to plummet, you won’t be able to borrow as much on a home equity loan. If this happens to enough people, it can affect consumer spending overall as people hold back on big-ticket purchases and home renovations.

Broken Eggs—The subprime crisis has created turmoil in the investment markets, which also may have lowered the value of your retirement savings. If you’ve invested in finance companies that have dabbled in subprime mortgages, your nest egg might be worth less.

How Can This Help You?
For some families, all of the subprime news is bad. For others, there may be a silver lining.

Buyer’s Market—Though it’s not a great time to sell a house, it may be a good time to buy one, particularly if you have strong credit and personal finances. “You may be able to buy more house and have much more choice,” Aleshire says.

Fix It Up—Homebuilders may offer you deals, complete with top-of-the-line amenities. If you’re looking to remodel your home, carpenters, electricians, plumbers and other tradespeople who would normally be working on new homes may be sitting idle and ready to put together a deal on a home repair or renovation. If you have the cash or very good credit, Aleshire says, “this is a very good time to use it.”

New Opportunities—When it comes to your retirement savings, the subprime crisis has created opportunities in both stock and bond funds. “Investors are now being paid more to take risk in the stock and bond markets, and many sectors unrelated to housing and the mortgage market have been dragged down from the fallout of the subprime crisis,” says Greg Anderson, senior portfolio manager at Thrivent Financial. Consider a diversified bond fund, which will benefit from falling short term interest rates. Mark Simenstad, Thrivent Financial’s vice president of fixed-income mutual funds, adds, “Bonds provide a good anchor in the storm, if it comes.” As with all investments, seek the counsel of your financial representative as you recheck and redirect your savings strategy.

What Are Your Next Steps?
Here are some ways to avoid subprime mortgage market troubles.

Credit Report—The price you pay for loans depends on your credit score, so make sure mistakes on your credit report aren’t dragging you down. “By law, everyone can get a free credit bureau report once a year,” Aleshire says. Inspect yours annually and file a dispute if you find problems. Credit reporting agencies are legally required to investigate and either support existing information or change your report.

Improved Credit—If your credit isn’t top notch, improving it may lower your future interest rates. “You want to be able to show that you make your payments on time and don’t carry a lot of revolving debt,” Aleshire says.

Home Equity Loans—Many Americans have run up consumer debt and refinanced it by tapping growing home equity. Home values—and thus available equity—are likely to stay flat or decrease in the year ahead. That means it’s a good time to break the habit of borrowing against your house to finance everyday purchases. If you can, pay off whatever home equity balance you have outstanding. If you can’t pay it off, control your spending and avoid adding to your debt.

Attention to ARMs—Unless you have financial flexibility, resist the temptation of an adjustable-rate mortgage’s low teaser payment. Opt for 15- or 30-year, fixed-rate mortgages. Simenstad notes, “Consider an adjustable-rate mortgage only if you’ll be in the house short term or have the financial flexibility to deal with adverse consequences, such as rising interest rates or declining home values in the short term.”

A Necessary Adjustment
The change in the housing and mortgage markets was bound to come after years of sharp home-price increases and aggressive mortgage lending. Fortunately, most consumers avoided the nastier fallout that some unfortunate borrowers have endured. “Well-prepared members who have taken the time to create an emergency savings account, reviewed their credit history and have a clear picture of how they save and spend money will be in pretty good shape in the months ahead,” Aleshire says.

Most of all, says Todd Sipe, president and CEO of Thrivent Financial Bank, “make sure you’re doing business with someone you can trust to advise you on your long term finances. Make sure your buying decisions are based on the payments over the total life of your loan, not just what you can afford to buy right now.”

Ingrid Case is a Minneapolis-based freelance writer who writes frequently about business and finance.

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