Recently the most buzzed about event in the real estate universe, the quick end of the sub-prime mortgage industry. Ok, that is a tad exaggerated. The sub prime market isn't gone, just much more strenuous than it has been in the last five years. Prior to last week, as long as you had a job and weren't in jail you could get approved for a mortgage loan. Suddenly, with much stricter lending policies, many sub-prime borrowers are discovering they are either unable to refinance their houses or unable to purchase a property at all.
Is this just the shockwave of the housing bubble bust? During the housing boom that ended in 2005, funds were given without thought into exotic mortgage loans that let people to purchase property with little down or without verifying their incomes. This was the gasoline that stoked the housing boom fire. Mortgage companies were completely aware of what they were doing all along. They had no justification offering some of their loan products to people of poor credit and in the thoughts of many people the very notion of doing so could be seen as predatory lending. I mean think about it, offering a couple who only makes minimum wage a 3 year arm loan? Chances are high that this person is going to default on that loan. But the banks didn't care one bit because the investors didn't care and so long as there was someone to purchase the loans back there was no need to look back.
And suddenly Freddie Mac ended it all. In the last week of February, government sponsored mortgage and securities investment organization known as Freddie Mac told the business markets that they were tightening their requirements and were no longer purchasing high risk loans made to people with low, or sub-prime, credit history. The effect of this news could be felt all throughout the world as stocks began to immediately sell off. Without this government sponsored organization to purchase back mortgages that lenders were creating, they would assuredly run out of monies to make more loans. And with the increasing number of defaults on owed loans, that capital would be gone even quicker and soon leave red ink. In light of this neck snaping change, many sub-prime lenders have closed their doors. At current count fourty four mortgage lenders have stopped business or radically scaled back their operations, including sub-prime goliath New Century. Now, lenders, financiers and buyers of mortgages are pulling back the reins as well.
The New Century example is of distinct alarm because of worries that problems in the sub-prime side could spread to prime mortgages, causing issues for many more lenders. The only question of the industry: What impact will the sub-prime mortgage situation have on the whole market? Sub-prime mortgages originated in 2006 could end up having more defaults than any previous year, according to studies conducted by asset bank UBS. Nearly eight-percent of all loans originated this year are at least 60 days delinquent, up from 4.5% less than year ago. Foreclosure instances have doubled in the past year as well.
The fallout will be most severely felt by minority and poor home buyers and owners who will discover issues in refinancing exotic loans that they can no longer afford. Those wanting to purchase homes with a small down payment or none at all will also be expected to pay higher interest rates and may not be able to simply declare their income without having documentation such as tax returns and check stubs.
