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The Fallout Of Sub-prime Home Loans
By TexasAppraisalTeam
Recently the most blogged about topic in the real estate world, the sudden death of the sub-prime lending industry. Ok, that is a tad exaggerated. The sub-prime market isn't dead, just much more strenuous than it has been in the recent five years. Before this week, as long as you were breathing you could get qualified for a home loan. All the sudden, with much more strict lending policies, many sub prime borrowers are discovering they are either unable to refinance their homes or completely unable to purchase a home at all.

Is this just the aftermath of the housing bubble bust? During the housing boom that ended in 2005, money was thrown recklessly into exotic housing loans that enabled people to purchase homes with a small amount down or without documenting their salaries. This was the fan that flamed the housing boom fire. Lenders were totally aware of what they were doing the whole time. They had no ethical right offering some of their loan products to people of poor credit and in the thoughts of many people the very process of doing so constituted as predatory lending. I mean use your head, giving a couple who only makes above 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 as long as there was someone to purchase the loans back there was no need to stop.

And that's when Freddie Mac ended it all. At the end of February, government sponsored mortgage and securities investment organization known as Freddie Mac informed the real estate industry that they were tightening their requirements and were no longer purchasing high risk loans made to those with weak, or sub-prime, credit history. The effect of this news could be witnesses all the way around the globe as stocks began to immediately drop. Without this government sponsored organization to purchase back

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mortgages that lenders were creating, they would surely run out of monies to make any more loans. And with the rising amount of defaults on outstanding loans, that capital would disappear even faster and soon take them under. In light of this neck snaping news, many sub prime lenders have gone the way of the buffalo. At recent count fourty-four mortgage lenders have shut down or seriously scaled back their operations, including sub prime goliath New Century. Now, lenders, investors and buyers of mortgages are slowing down as well.

The New Century case is of specific worry because of reservations that trouble in the sub prime game could spill over to good credit mortgages, causing troubles for many more lenders. The only question of the day: What influence will the sub prime mortgage disaster have on the whole economy? Sub-prime mortgages originated in 2006 could end up having more defaults than any previous year, according to explorations held by asset bank UBS. Almost eight-percent of all loans originated this year are 60 days of more late, up from 4.5% less than year ago. Foreclosure rates have doubled in the past year as well.

The decline will be most harshly experienced by minority and fixed income home buyers and owners who will encounter trouble in refinancing adjustable rate loans that they can no longer afford. Those wanting to purchase homes with a small down payment or none at all could also be required to accept higher interest rates and will likely not be able to simply declare their income without providing documentation like tax returns and paycheck stubs.

This article was written by R. Chandler Smith, an up and coming real estate authority in the Greater Austin area. He operates Austin Appraisals

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