The Causes of the Unexpected Real Estate Lending Crash

It is recently the most blogged about issue in the real estate world, the quick fallout of the sub-prime mortgage industry. Ok, that is a little exaggerated. The B paper market isn't dead, just much tighter than it has been in the past five years. Before today, as long as you were a legal citizen making minimum wage you could get qualified for a home loan. Now, with much tighter lending policies, many bad credit borrowers are finding themselves either unable to refinance their homes or unable to purchase a property at all.

Perhaps this is just the ripple of the housing downfall? During the housing boom that ended in 2005, money was given without thought into creative housing loans that enabled people to buy homes with nothing down or without providing verification their ability to repay the loan. This was the fan that flamed the housing boom fire. Lenders were totally 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 eyes of many people the very act of doing so could be seen as predatory lending. I mean think about it, giving a couple who only makes 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 one bit because the investors didn't care and as long as there were investors to buy the loans back there was no need to quit.

And suddenly Freddie Mac made their statement. On February 27th, government sponsored loan and securities investment organization known as Freddie Mac informed the real estate world that they were tightening their standards and were no longer buying back high risk loans made to borrowers with poor, or sub-prime, credit history. The shockwave of this news could be felt all across the world as stocks began to almost immediately sell off. Without this government sponsored group to buy back loans that lenders were originating, they would assuredly run out of monies to make more loans. And with the increasing rate of defaults on outstanding loans, that capital would disappear even faster and soon turn into a negative. Because of this neck snaping change, numerous bad credit lenders have shut down. At recent count forty plus home loan lenders have shut down or drastically scaled back their companies, including bad credit monster New Century. Now, lenders, investors and purchasers of mortgages are slowing down as well.

The New Century instance is of distinct interest because of worries that problems in the bad credit business could spill over to prime mortgages, causing issues for many more lenders. The only question of the day: What influence will the bad credit home loan situation have on the whole economy? B paper mortgages made in 2006 might end up having more defaults than any previous year, according to explorations conducted by financier bank UBS. Nearly eight-percent of all loans made this year are at least 60 days unpaid, up from 4.5% a year ago. Foreclosure numbers have doubled in the past year as well.

The decline will be most ruthlessly experienced by minority and poor home buyers and owners who will find problems in refinancing interest only loans that they can no longer afford. Those wanting to buy homes with a small down payment or none at all will also be expected to suffer higher interest rates and may not be able to simply declare their salaries without having documentation such as W-2s and check stubs.

Article Source: http://www.real-estate-article-directory.com

This article was written by R. Chandler Smith, an up and coming real estate expert in the Houston area. He oversees Houston Texas Real Estate Appraisal

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