We have all been hearing a great deal of discussion regarding subprime mortgage lending in the past few weeks, and many people are asking…What is subprime lending and how does it affect me?
According to Wikipedia, SUBPRIME describes a specific lending market sector. Typically, subprime customers are those who do not qualify for prime market rates because of blemished or limited credit. Consequently, subprime customers are charged a higher interest rate to compensate for the increased risk. The general lending philosophy can be described as "priced to risk"; the higher the risk on the deal, the higher the interest rate. Statistically, approximately 25% of the population falls into this category.
It has been suggested that the recent fall in the stock market is somehow associated with the subprime issue. There has also been mention of a possible collapse in this area of the mortgage market and hence, a greater difficulty in getting mortgage financing.
Yes, the foreclosure rate in this market segment has recently been rising. It is probable that these types of loans will not be written as aggressively in the future as they have in the past. It has been noted by Baird and Warner’s Financial Services Senior Vice President/Chief Operating Officer Donna Burge, the changes that are occurring right now are being driven by 3 factors:
1. Federal bank regulations introduced last fall requiring stricter underwriting guidelines and risk-based pricing
2. A significant increase in delinquencies and defaults in sub-prime portfolios, requiring increased reserves and earnings adjustments
3. Wall Street prices for sub-prime mortgages have declined dramatically, diminishing both the value and outlet for this product.
What does this mean for borrowers? Several subprime lenders have already, or will soon go “belly up”. Most of America’s financial institutions will not experience any serious disruption of business or severe financial losses because they do not have a great deal of exposure to the subprime marketplace. Most traditional mortgage products will continue to be available to borrowers. Stay tuned to see how this story plays out.
2 comments:
Question, please: we are reading about the subprime lenders getting into severe financial difficulties because they gave mortgages to people who were "high risk" borrowers, and this year is expected to be a banner year for foreclosures. What does all this mean to the buyer who does NOT need to use a subprime lenders? Will there be even MORE houses on the market suddently, due to foreclosures, are these foreclosure homes a bargain to purchase, and will this further put pressure on sellers to take less money for their home that is on the market?
You have asked several good questions. It is highly unlikely that the subprime market collapse will make mortgage money less available to "prime" borrowers. On the contrary, the "flight to quality" that has coincided with this collapse in the subprime market, has made rates slightly lower for users of higher quality mortgage products.
In some areas, there probably will be additional homes coming on the market. One thing to keep in mind is that the last thing that lending institutions would prefer would be for them to be the owners of large amounts of real estate (through default). They went through the savings and loan crisis several years ago, and they hardly would like to revisit that event.
Under certain circumstances, there are opportunities to purchase homes in foreclosure, however this can be a very slippery slope, and there is a great deal of risk involved. Many foreclosure investors are very sophisticated and it can be difficult for the uninitiated to compete with them.
It is unlikely that the North Shore market will experience a great deal of direct impact from the subprime debacle because it appears that there is a fairly low ratio of these types of loans being written in this area. However, if it does produce an increase in inventories of homes for sale, it may have some impact on prices.
Post a Comment