The Fallout of the Sub-Prime Housing Industry

By: R Chandler Smith

Recently the most talked about topic in the real estate universe, the sudden end of the sub-prime lending industry. Ok, that is somewhat exaggerated. The B paper market isn't gone, just much tighter than it has been in the past 4 years. Before this week, as long as you had a job and weren't in jail you could get approved for a mortgage loan. Now, with much tighter lending policies, many B paper borrowers are realizing they are either unable to refinance their houses or completely unable to buy a property at all.

Perhaps this is just the aftermath of the housing bubble bust? During the housing boom that ended in 2005, money was dumped with abandon into unconventional mortgage loans that allowed people to buy houses with a small amount down or without submitting evidence their salaries. This was the gasoline that stoked the housing boom fire. Mortgage companies were totally aware of what they were doing the whole time. They had no justification offering some of their loan products to people of B paper credit and in the thoughts of many people the very notion of doing so constituted as predatory lending. I mean let's be real, offering a person who barely makes minimum wage a 3 year arm loan? What do you think is going to happen in 3 years? But the banks didn't care one bit because the investors didn't care and so long as there were investors to buy the loans back there was no need to stop.

And suddenly Freddie Mac dropped the axe. In the last week of February, government sponsored loan and securities investment organization known as Freddie Mac told the real estate world that they were tightening their requirements and were no longer purchasing high risk mortgages made to people with weak, or sub-prime, credit history. The shockwave of this announcement could be witnesses all the way around the globe as stocks began to immediately deflate. Without this government sponsored group to buy back loans that lenders were creating, they would assuredly run out of cash to make new loans. And with the increasing number of defaults on owed loans, that capital would dry up even quicker and soon take them under. Because of this neck snaping change, numerous B paper lenders have shut down. At recent count fourty four home loan lenders have closed their doors or significantly scaled back their outfits, including B paper goliath New Century. Now, lenders, investors and buyers of mortgages are slowing down as well.

The New Century case is of specific interest because of anxieties that issues in the B paper business could spill over to prime mortgages, causing issues for many more lenders. The only question of the moment: What influence will the B paper home loan crisis have on the general economy? Sub prime mortgages created in 2006 might end up resulting in more defaults than any previous year, according to studies held by investment bank UBS. About 8% of all loans created this year are 60 days of more late, up from 4.5% a year ago. Foreclosure rates have doubled in the past year as well.

The fallout will be most rigorously felt by minority and fixed income home buyers and owners who will encounter difficulty in refinancing creative loans that they can no longer afford. Those hoping to buy homes with a small down payment or none could also be forced to accept higher interest rates and will likely not be able to simply declare their income without having documentation such as W-2s and paycheck stubs.

Article Source: Loan Info Center

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