Mortgage Loan - The Causes of the Sudden Real Estate Lending Crash
It is currently the most blogged about issue in the real estate world, the sudden fallout of the sub-prime lending industry. Ok, that is somewhat exaggerated. The bad credit market isn’t over, just much more strenuous than it has been in the last five years. Prior to today, so long as you had a job and weren’t in jail you could get approved for a mortgage loan. All the sudden, with much harder lending policies, many B paper borrowers are realizing they are either unable to refinance their homes or completely unable to purchase a house at all.
Perhaps this is just the ripple of the housing backslide? During the housing boom that ended in 2005, funds were given recklessly into unconventional home loans that let people to purchase property with a small amount down or without documenting their incomes. This was the fan that flamed the housing boom fire. Mortgage companies were well mindful of what they were doing the whole time. They had no ethical right offering some of their loan products to people of bad credit and in the thoughts of many people the very notion of doing so could be seen as predatory lending. I mean let’s be real, offering a person who only makes above minimum wage an interest only 3 year loan? Chances are high that this person is going to default on that loan. But the banks didn’t care primarily honestly because the investors didn’t care and as long as there were investors to purchase the loans back there was no need to quit.
And that’s when Freddie Mac dropped the bomb. In the last week of February, government sponsored mortgage and securities investment organization known as Freddie Mac informed the real estate world that they were tightening their requirements and were no longer buying back high risk loans made to people with bad, or sub-prime, credit reports. The aftermath of this announcement could be witnesses all across the globe as stocks began to almost immediately sink. Without this government sponsored entity to purchase back loans that lenders were developing, they would ultimately run out of cash to make more loans. And with the rising amount of defaults on owed loans, that capital would be gone even faster and soon put them in the red. Due to this neck snapping news, many B paper lenders have stopped operations. At recent count forty four home loan lenders have stopped business or seriously scaled back their outfits, including B paper goliath New Century. Now, lenders, financiers and buyers of mortgages are stopping as well.
The New Century illustration is of particular alarm because of qualms that trouble in the B paper industry could spill over to A paper home loans, causing issues for many more lenders. The ultimate question of the moment: What influence will the B paper home loan situation have on the national market? Sub prime mortgages made in 2006 may possibly end up having more defaults than any previous year, according to explorations conducted by financier bank UBS. Almost 8% of all loans made this year are 60 days of more unpaid, up from 4.5% a year ago. Foreclosure rates have doubled in the past year as well.
The pullback will be most severely experienced by minority and poor home buyers and owners who will discover trouble in refinancing creative loans that they can no longer afford. Those looking to purchase homes with a small down payment or none at all could also be required to pay higher interest rates and may not be able to simply state their salaries without having documentation like W-2s and paycheck stubs.
