A Quick Dissection of Supbrime Mortgage Problems and What it Means to You

Headlines are flying and stock prices as diving...what is happening to the US subprime mortgage industry? I'm no economist, but I took a stab at breaking down the news into plain English. Let's start with a few definitions:

• Subprime Borrower - In lender speak, this is any consumer who doesn't meet the basic criteria for "prime" rates. Usually, it means the borrower has a credit score below the 650-620 range. According to Fair Isaac, about 40% of the population has a score below 700.
• Subprime Mortgages - Lenders compensate for a borrower's risky credit by charging higher rates. A majority of subprime loans are adjustable rate and about 70% of subprime loans have prepayment penalties that discourage borrowers from refinancing.
  

Now, let's take a look at the facts:

• The subprime mortgage industry grew very rapidly over the last decade. Subprime mortgage loans accounted for 5% of originations in 1994 vs. 16% of originations in 2006.
• Mortgage delinquency and foreclosure rates are on the rise in many areas. This chart from San Diego shows the dramatic spike over the last few months and this report found that 13% of subprime borrowers are more than a month late with their loan payments.
• Many large banks (including HSBC and New Century) publicly admitted to underestimating the default risk on their subprime mortgage business and have warned of trouble ahead.
• Many subprime mortgage lenders have closed, filed for bankruptcy, been sold or faced major financial hits recently. There is even a site called the Mortgage Lender Implode-o-Meter that tracks these closures daily.
• ABX indexes (ABX-HE-BBB) are dropping sharply. This is complicated, but basically means investors are choosing not to own insurance against defaulting mortgage bonds.
• Federal regulators are investigating the subprime mortgage industry; saying that "subprime borrowers may not fully understand the risks" of their unorthodox loans.
• Mortgage giant, Freddie Mac, has announced plans to stop buying certain kinds of high-risk loans and will apply new standards.

What does this mean to you?

• Suprime mortgage rates are on the rise as lenders try to regain their balance.
• Borrowers with bad credit are going to find it harder to get a home loan or refinance. Subprime lender, First Franklin, recently sent an email to its brokers that raised the minimum score for 100% financing from 580 to 620.
• Mortgage lenders may be less willing to help borrowers who are struggling to pay their bill. Traditionally, banks offered forbearance programs and payment plans to borrowers in trouble. Gretchen Morgenson's column (subscription required) in the New York Times addressed this topic.
• The stock market is shaky in reaction to the financial news from subprime mortgage lenders. Subprime loan news played a role in last week's stock market drop.
• Regulators may continue to take a closer look at the subprime loan market and could pass lending reforms that would impact more banks and consumers.

Whew! That was a mouthful. Did it help you better understand the subprime mortgage issues that are in the news today? It certainly helped me clear some things up. Tomorrow, we'll talk about how you can stop being a subprime consumer.

Comments

[zhafran]

Borrower Beware
Recent research reveals that subprime mortgages are three times more likely to happen in minority neighborhoods. Even affluent minorities are more likely than whites to take out subprime mortgages. The AARP notes that older female borrowers held 45% of subprime mortgages and only 28% of prime mortgages.

Some dishonest lenders will try and exploit the financial troubles of borrowers by offering easy-but-expensive credit that could lead to them eventually losing their homes. Or, these disreputable people resort to exorbitant fees, prepayment penalties or balloon payments to snare the unwary.

http://www.equityloansecrets.com

[Brian]

Thanks for your time in explaining this!!