No More Sub-Prime Loan Programs

Recently the most buzzed about issue in the real estate world, the abrupt death of the sub-prime mortgage industry. Ok, that is a tad exaggerated. The creative market isn't over, just much more strenuous than it has been in the past four years. Before today, so long as you were a legal citizen making minimum wage you could get approved for a mortgage loan. Now, with much more strict lending policies, many B paper borrowers are finding themselves either unable to refinance their houses or completely unable to buy a property at all.

Is this just the ripple of the housing bubble bust? During the housing boom that ended in 2005, money was tossed without thought into creative home loans that allowed people to buy property with little down or without verifying their ability to repay the loan. This was the fan that flamed the housing boom fire. Lenders were completely aware of what they were doing all along. They had no right offering some of their loan products to people of poor credit and in the eyes of many people the very act of doing so was an example of predatory lending. I mean think about it, giving a person 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 primarilyhonestly because the investors didn't care and as long as there was someone to buy the loans back there was no need to look back.

And suddenly Freddie Mac dropped the bomb. At the end of February, government sponsored mortgage and securities investment organization known as Freddie Mac informed the real estate markets that they were tightening their standards and were no longer purchasing high risk mortgages made to people with weak, or sub-prime, credit history. The aftermath of this broadcast could be witnesses all throughout the globe as stocks began to immediately deflate. Without this government sponsored entity to buy back mortgages that lenders were developing, they would surely run out of cash to create any more loans. And with the increasing number of defaults on previously made loans, that capital would be gone even faster and soon leave red ink. Because of this quick news, many B paper lenders have closed their doors. At current count fourty-four home loan lenders have shut down or significantly scaled back their outfits, including B paper leviathan New Century. Now, lenders, financiers and buyers of mortgages are following suit as well.

The New Century instance is of distinct worry because of reservations that trouble in the B paper business could spill over to A paper lending, causing pain for many more lenders. The most asked question of the day: What impact will the B paper home loan crisis have on the general market? Sub prime mortgages made in 2006 might end up having more defaults than any previous year, according to research performed by financier bank UBS. Nearly 8% of all loans made this year are at least 60 days late, up from 4.5% less than year ago. Foreclosure numbers have doubled in the past year as well.

The decline will be most harshly felt by minority and low income home buyers and owners who will discover trouble in refinancing exotic loans that they can no longer afford. Those hoping to buy homes with a small down payment or none could also be required to suffer higher interest rates and will likely not be able to simply declare their salaries without having documentation such as W-2s and paycheck stubs.

Copyright R. Chandler Smith, a talented real estate authority in the Houston and San Antonio TX areas. He manages Houston Appraisals along with Houston Home Realtor

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