Are subprime loans to blame for the increase in foreclosures?
Subprime To Blame
There has been a dramatic rise in foreclosures and loan defaults throughout the nation. Foreclosures increased 47% in March 2007 from one year ago (www.bloomberg.com). Subprime loans have been on the rise as well. “Last year, 13.5 percent of mortgages originated in the U.S.were subprime, according to the Mortgage Bankers Association, compared to 2.6 percent in 2000. In 2001, subprime loans made up just 5.6 percent (www.money.cnn.com).” Some say that subprime loans are to blame for the increase in foreclosures. Let’s look at why subprime loans are taking such a bad rap.
500% higher Defualt Rate on SubPrime vs. Prime
According to Inman.com, “The delinquency rate in subprime loans stood at 13.33 percent at the end of 2006, compared with 2.57 percent for prime loans, the Mortgage Bankers Association said.” Now that’s a much larger percentage of delinquent loans. And the delinquency rate isn’t going to improve anytime soon. MarketWatch.com reported that, “One million subprime borrowers face large payment resets this year, and another 800,000 will next year, FDIC has said.” How can the high delinquency rate be reduced in the future? Sheila Bair, Chairman of the Federal Deposit Insurance Corp. seems to have a simple solution. She says, “Fundamentally, borrowers should be given loans they can afford to repay both today and in the future (www.MarketWatch.com).” Lawmakers, regulators and the mortgage lending industry have imposed tighter restrictions on loan products and underwriting practices to reduce the probability that borrowers will take on a risky loan that they will not be able to perform.
Consumer rights attorney Irv Ackelsberg. "This fraud infested market has been producing little social benefit," he says. "Mortgage origination practices are run over by greed."He guesses that as many as five million foreclosures may occur over the next several years, basically saying, if you think it's bad now, wait until all those ARMs reset.
Excesive Easy-Credit Leading the Way
Why do borrowers choose risky loans to begin with. The Boston Globe (www.boston.com) reports that, “Homeowners increasingly use them to refinance and consolidate household debts when their credit scores fall in the wake of bankruptcy, high medical bills, or other setbacks...They are being tapped by borrowers in all income ranges, who struggle with poor credit ratings stemming from modest incomes or excessive credit card or other debts.” It’s interesting that the reasons in which borrowers choose subprime loans are similar to the reasons borrowers with prime loans go into foreclosure. Above is a pie chart that illustrates the driving forces in foreclosure of prime loans. Jobs!
It seems great care should be taken when subprime loans are given and taken because it affects the entire housing industry and the economy. According to The Boston Globe (www.boston.com), “The value of surrounding homes goes down, and other homeowners will have difficulty selling or refinancing their homes, leading to further disinvestment in communities.”
Submitted by Tina Clark