Whats REALLY going on in the mortgage industry?

Question

can someone please break it down for me? What effects will this have on sub-prime mortgage companies?

Answer 1

This is a long complicated answer. I am a mortgage broker in the Midwest that does prime, subprime, Alt A, and government.

Essentially, the foreclosure rates for loans that were funded over the previous 5 year boom in the housing industry are astronomical. Products like negative amortization and interest only put a lot of homeowners in a situation where they couldn't keep up with their payments once they adjusted to a regular amortization schedule and there was no equity in their home to sell it.

Due to the high foreclosure rates, investors responded by making significant changes to the qualifications of certain subprime loans. For instance, the credit score requirements increased dramatically to do no money down loans or stated income loans in order to combat the high risk levels they were dealing in before.

The foreclosure rates continued to climb and the business stalled because they made it harder for people to get money, so lenders became strapped for cash. A lot of lenders acted like consumers in that they overextended themselves as well borrowing cheap money on teaser rates that caught up with them.

Investors pulled their money out of lenders in the subprime market and rendered the lenders without the ability to fund any transactions and thus close. Others faced legal issues and were shut down because of fraud and still others just couldn't keep up with their debts and filed for bankruptcy.

What this has done in the subprime market is make is hard to get loans done. When I normally would have 15 different lenders taking a loan, I may now only have 1 or 2 if any at all. Thus, less people can buy houses so the real estate market has suffered as well which effects consumer confidence in the market which effects their spending which makes investors and lenders even more fickle when it comes to these matters.

There are a lot of contributing factors with the Fed raising rates that go beyond this that are affecting the overall mortgage industry (but the rates are still very low compared to historic averages).

Answer 2

Over the last several years there has been a wild competition to get loans, especially subprime loans. A lot of companies have been making 100% or even 105% loans on properties, especially on ARMs. Now that interest rates have risen, many people are defaulting and many institutions are taking huge loses due to foreclosing on properties. Because interest rates are higher, and so many owners are selling, property values are down in most areas, making the situation worse.

So there is not as much money available to make loans, lenders are much more frightened of making anything resembling a subprime loan. This causes the problem to get even worse, since fewer people can get mortgages, thus there are fewer buyers, thus even more houses not selling, which means housing prices go lower.

The US Central bank is pumping money in to try to keep the market liquid, but it is a loosing battle right now

So in the near future, a lot of lenders will go bankrupt, interest rates will probably continue to rise and loans for anything other than prime borrowers will get tougher and tougher to get. This probably will get worse over the next 18 months.

After everything stabelizes, things will get better, but it will be painful in the near term.

Answer 3

The classic bust after a sustained boom. When things get too far away from basic economic fundamentals it must eventually correct itself.
When that happens all the weak players that stretched too far to own, have no room left when rates go up and the mortgage is now $500 or more due to the mortgage reset.
They are forced to sell or foreclose leaving a lot of supply that drives prices down. The lenders that loaned money to basically unqualified buyers end up with worthless or non performing loans.

Answer 4

Poor job market and economy equal foreclosures. Forclosures cost the mortgage industry an average of $40,000 each. These cause guidelines to tighten. The people who want or need loans can't qualify (which may result in more foreclosures). People are not convinced that we have hit bottom in the housing market and they are not buying (no new purchase mortgages). Most people don't know enough people, who know people, that need a mortgage. Because mortgages are regulated as much as they are, it's hard to stay in business without more work.

Answer 5

Several have already filed for bankruptcy and laid of most employees .
The rest will follow soon .
Currently those with high FICOs and at least 10% down are qualifing for mortgages .
The mutual funds and pension plans that had $$$ in those subprimes are defaulting , and some older people's pensions may be reduced .

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Answer 6

the sub prime market failed because so many people took out adjustable rate or interest only loans who could not afford to pay the higher rate when it adjusted, or were unable to pay a full principle and interest payment. Thus causing defaults and foreclosures. You have to understand, we are all at fault. We all wanted more and more equity from our homes, so prices went up. Then the metropolitan councils screamed that there wasn't enough "affordable" housing, so in comes the loan companies with programs to help people buy homes. And here we are. It's my opinion, whatever it's worth.

Answer 7

Did you listen to the Bush Speech?
do you know the sub-prime loan or anything that smells like it is dead?
do you realize that the Federal Reserve has dumped $70 Billion into our local banks just to keep them afloat?

NO? do some research, read the paper, listen to the news....

good luck :)

Answer 8

Most sub-prime will claim bankruptcy. They have already started, and it will not stop any time soon. It will be a few yrs before the market recovers.