Monday, July 16, 2007

The Subprime Crisis

Subprime lending, also called "B-Paper", "near-prime" or "second chance" lending, is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history. Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high-interest rates, bad credit history, and murky financial situations often associated with subprime applicants. A subprime loan is one that is offered at a rate higher than A-paper loans due to the increased risk.
Some of you may be wondering, why we haven't talked much about the "subprime lending crisis." We have noted that buyers have been seeking alternative financing to compensate for decreased afford ability. Some of these buyers have turned to suprime loans in order to qualify for their home purchase. Subprime loans do help some buyers who would otherwise not be able to enter the market. The downside is that the flexibility has encouraged misuse by some predatory lenders. As a result, we have seen an increased number of foreclosures and short sales. This fact has prompted us to caution buyers about their lending options (See the post titled, Would You Risk an Extreme Mortgage.) However, the impact on housing prices has not been great enough to affect our forecast for the general East Bay real estate market.

An independent real estate market forecaster, Housing Predictor, reported the following:
Hundreds and perhaps thousands of local real estate markets scattered throughout the U.S. are insulated from the sub-prime loan crisis and as a result are not suffering from fall out of the sub-prime fiasco, according to the latest Housing Predictor study.
Beginning in late 2006, subprime mortgage lenders began filing bankruptcy. This meltdown prompted some economists to fear a fallout similar to the U.S. Savings and Loan Fraud Crisis of the late 1980's. Although our market has experienced a healthy leveling, this gloomy prediction is not being realized. The subprime crisis seems to have been limited to less affluent areas with less healthy local economies.

1 comment:

Anonymous said...

I think the Housing Predictor is very optimistic and disagree that the subprime crisis will be limited to less affluent areas within the Bay Area.

Take a look at what's happening on Wall Street this last week in July.

More on this from Tuesday's New York Times, July 31, 2007:

More Lenders Feeling Pain from Defaults

“Problems in the mortgage market spread deeper and farther afield yesterday.

Trading in the shares of a large mortgage company was suspended yesterday, and the nation’s largest insurer of home loans said its stake in a business that underwrites and invests in mortgage securities may be worthless. Earlier, a German bank acknowledged that its investments in American loans have deteriorated.

The developments are the latest indications that the housing slump will affect a broader segment of the mortgage industry and that the problems will last longer than many officials had suggested earlier this year. Just last week, the nation’s biggest home lender, Countrywide Financial, acknowledged that defaults on second mortgages to prime borrowers were rising quickly.”