Home Mortgage Loans-The Role of Sub Primes in Todays Market
There is little doubt that sub prime lending at least in part fueled the housing boom. There is also little doubt that sub prime lending has fueled what has become a huge spurt in foreclosures that may last into the next few years.
For five years starting in 2000 the housing industry was in "boom" mode because of the relaxed underwriting and creative new types of mortgages in the market. Now those same companies are going out of business right and left.
Just in the last few weeks hardly a day goes by that you don't hear or see news of a new scandal related to sub prime loans.
What does it all mean? How will this translate into future business?
1. SUB PRIME RATES will probably go up. Because of all the defaults the economic pressure clearly dictates a rise in the rates going forward. How much is unclear. One half to one full percentage point is the consensus.
2. NEGATIVE IMPACT on the home buying market. It translates to less potential buyers in the marketplace. As many as 16% of homebuyers in recent years have been sub prime borrowers-that is a big number to deal with.
3. LIMIT MORTGAGE CREDIT to some at the margins who maybe shouldn't qualify anyhow.
4. UNDERWRITING CRITERIA will go up. This will make it more difficult for many to qualify for a loan.
5. ELIMINATE SOME BORROWERS from the marketplace. You could argue that they shouldn't have been there in the first place.
All this will be accentuated and magnified because of the slowdown in the industry to begin with. In a roaring boom no one would notice. In a slowdown like we have now every glitch shows up.
There will always be a sub prime market it just won't look like the one you remember from two years ago. It is a great example of how markets work. It will pretty much fix itself (as long as the Feds stay out of it).
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