The Future of the Mortgage Market: The Housing Dip, the Credit Market, and Advice to Buyers and Sellers

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There is no denying it anymore; money is tight and it will be for quite some time. The current mortgage and loan outlook is grim at best, leaving many future borrowers to wonder when everything will finally turn around.

How Long Can the Housing Slump Last?

Unfortunately the answer to that seems to be further out than the current prognosticators think. Additionally, the problem goes beyond the current subprime market woes and has spread to the greater credit markets. It turns out that lenders have simply been too loose in their underwriting standards and that fact is now coming back to bite them and their customers alike.

It begins with the subprime debt market. As more and more consumers begin to default, the value of subprime mortgages fall. In a vacuum this fact would be just another normal cycle of business, calling for a moderate market correction. However, combined with the declining real estate market values and the tightening of lenders’ pursue strings, this snowball turns into an avalanche.

The cause and effect of this situation is quite ominous. At first many banks were not concerned with defaults because strong property values acted as good downside protection in the event of a default. Conversely, as more and more consumers began to default, banks saw the need to tighten their lending practices. This act, combined with the increased defaults, led to lower real estate values, effectively removing many banks’ downside protection.

Where Will the Real Estate Market Go from Here?

Widespread panic has set in. As property values drop below mortgages for many new home buyers, the incentive to continue paying off their debt declines. For many people who struggle, it will be easier to simply give the home back to the bank and move into an apartment. Banks are not in the property business, so they then try to move their properties as quickly as possible, often selling at below market values and decreasing the potential value of homes in many markets.

The sad truth is that this is the beginning of a cycle that will probably repeat itself for the next year or two. When the dust finally settles, the real estate market will have experienced low, no, or negative growth and the rate of homeownership will decline significantly from its current record high.

What Should Buyers and Sellers Do Now?

Advice to sellers: Wait if at all possible. In many markets, sellers will be competing against bank foreclosures and real estate developers giving deep discounts. In most markets sellers should expect longer and longer time on the market and a significantly reduced number of offers. Additionally, these offers will probably come in 10% or more under the asking price. Now is not the time to be greedy. If there is a good offer on the table, strongly consider taking it.

Advice to buyers: Wait if at all possible. Everything points to this situation getting worse before it gets better. In a year many sellers will be desperate and many neighborhoods will experience a price decline. This will be a great time to buy new homes straight from a developer or to look into foreclosed properties. Banks will entertain all offers, so negotiate. Get a great agent and make them earn their commission.

Pay Back Student Loans with an Income Based Repayment Plan

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The majority of young people can’t afford to enter higher education without taking on at least some college student loan debt. According to FinAid, 65.6% (almost two-thirds) of 4-year undergraduate students left university with owing money. Excluding PLUS loans, the average amount of student loan debt owed by seniors stood at $23,186. Whilst repaying this money can usually be deferred for up to 3 years, this is not a long term solution. Student loan default doesn’t provide the answer either. In fact, defaulting will result in fewer federal options being available to deal with any future financial difficulties.

Why College Student Loan Debt is Difficult to Eliminate

Unlike unsecured loans and credit cards, it is not normally possible to file for student loan bankruptcy in order to clear college loan debt. This is because allowing this would open the floodgates for unprecedented levels of bankruptcy amongst desperate graduates. The only exception to this rule is those who have a permanent illness that seriously effects their earning potential. It would need to be demonstrated that student debt repayment would bring serious financial hardship on a family. As it stands under the current laws, any money that is borrowed to fund university will need to be repaid.

An Income Based Repayment Plan to Clear College Loan Debt

The College Cost Reduction and Access Act of 2007 introduced a new method of student debt repayment, the income-based repayment plan. It came into force on the 1 July 2009 and now allows a graduate to repay the money they owe at an affordable rate. The graduate will pay 15% of the difference between the poverty line income ($10,830) and their own annual income. This means that, if that person earns $30,000 a year, they will make a monthly college student loan debt repayment of just $239.63. Although it will be taxable, after a period of 25 years, any outstanding debt will be written off.

Pay Back Student Loans at an Affordable Rate No matter how bad things may seem, never default on a student loan as this doesn’t provide the answer. Always talk to the lender. An income based repayment plan can provide significant student debt relief because it not only allows that person to reduce their repayments, there is also light at the end of the tunnel. Although any remaining college loan debt will be written off after a period of 25 years has elapsed, under existing Inland Revenue Service (IRS) rules, it is still taxable.