7 Thoughts on What are the main causes of the Sub Prime Mortgage Market decline?
  1. Reply
    A. Qurius Muse
    February 6, 2014 at 6:09 am

    Adjustable Rate Mortgages.

    The sub-prime market got an ARM mortgage rather than a mortgage at a fixed interest rate. When the interest rate increased, the monthly premiums were more than they could pay, so many sub-prime mortgage holders defaulted on their loans.

  2. Reply
    February 6, 2014 at 6:26 am

    The false economy that was the result of creative lending.

  3. Reply
    February 6, 2014 at 7:24 am

    Greedy brokers are part of the problem. Greedy investors are another part of the problem (their demand for high-yielding investments allowed for the relaxation in lending requirements. More to follow at the end).

    And naive or stupid borrowers round out the rest. Some simply didn’t understand how difficult it would be to afford their payments, especially after they began to adjust.

    But many times, someone calls or walks in and says they want to buy their dream house, almost regardless of whether they can really afford it. The loan programs that were available allowed these loans to be done, again almost without regard for the actual affordability. Most brokers simply used the products and guidelines that were available to get their clients what they demanded. If they didn’t, the broker down the street would instead.

    Meanwhile, the market has overreacted and clamped down on guidelines probably too severely. This is typical of any crash in any financial market, and in time, things will turn back around and give it another 5 years and they’ll do it to themselves all over again.

    Wall Street did this to themselves, ultimately. These mortgages were packaged together and sold as bonds to investors. They created derivatives and credit swaps and all sorts of financial wizardry to chop up and resell the risk to the people who wanted it. Some investors are very willing to take great risks if they can potentially earn 2-3X what they could in a safer investment. With Treasury bonds paying little more than what inflation was costing, they got greedy and found a nice pot of money with these subprime loans. The risks were so widespread, and rarely in the hands of anyone who actually had anything to do with creating the loan in the first place, that no one was watching to make sure these loans could actually perform. When they didn’t, they became a hot potato that got passed around until someone got burned.

    The fact that the housing market has ceased to appreciate in most areas, and to decline in others, is also a big factor. People literally think “I’ll just give the bank their house back if I can’t pay”. That’s just dumb, but there’s lots of people who think like that, like it’s no big deal. 50 years ago, people would commit suicide if they lost their home in foreclosure or had to file bankruptcy. Now it’s a rite of passage.

  4. Reply
    February 6, 2014 at 8:06 am

    Normally houses increase in value called appreciation. If this appreciation is normal people with adjustable loans can refinance out of them into a stable fixed rate loan.

    Real estate did not appreciate as usual, therefore the borrowers had no equity to refinance out of the adjustable mortgages.

    Since this happened there were an extreme amount of foreclosures. Since a note is now in default the original company that lent the money now have to repurchase the loan from the investor they sold the mortgage and note to.

    Since the original mortgage company have to repurchase the note they now no longer have money to lend, siince it is tied up in the repurchase of the mortgage notes, thus they are now at a stalemate and have to cease operations.

    The sub-prime market is still there it did not decline. There are potential home buyers that would and could use the sub prime lenders.

    I hope this has been of some use to you, good luck.

    “FIGHT ON”

  5. Reply
    February 6, 2014 at 9:02 am

    Rising interest rates due to adjustable mortgages.

    Case in point, home buyer purchases a home using a loan that has a fixed interest rate for 2 years. That initial rate is low enough that the person can qualify to purchase the home. These buyers typically don’t have a lot of cash for down payment either so the home is heavily leveraged. If the value continue to rise, the buyer can refinance after the 2 year period back into another loan that does not adjust or is fixed for a certain period of time again.

    Unfortunately, value are not continuing to climb and therefore there is no room to refinance into another loan and so the loan they have increases to Prime (For example 5%) rate plus a Margin (Say 3%) which could put the rate so high that it makes the home unaffordable. In this case, a person paying 5.5% can end up paying 8% or more on hundreds of thousands of dollars which can really add up. This is going from paying $ 55 per thousand to paying $ 80 per thousand borrowed.

  6. Reply
    February 6, 2014 at 9:52 am

    A high percentage of defaults on sub-prime loans. That means many people who used these types of loans failed to pay thier mortgage payments and ended up in foreclosure. Many of these loans were re-packaged as securities on Wall Street. When performance declined, investors started to pull thier money. This meant that the money pool for lenders to lend dried up which caused the rash of sub-prime lenders to close down. Unfortunately, this ultimately means that the consumer will have less choices and many people who could get 100% financing last year will now need to save money for a down payment this year.

    Also, the plunge felt in many markets across the US has driven home values down in the last few months. Many home owners who purchased homes in the last 2 or 3 years are now finding out that they owe more than the house is worth. This makes it almost impossible for them to refinance thier homes like many people do after a few years of the home purchase. For example, I have a client now that has excellent credit, a boat load of assets but he is having trouble refinancing his home. I explained to him that the value on his home was $ 60,000 less than what it will appraise for. He is refinancing but will have to pay $ 60,000 to close escrow on his house. I have several other clients that have great credit but will have no choice but to let the house go into foreclosure because they owe more than what the house is worth and thier mortgage payments will adjust too high for them to afford.

    I have attached a link to a website that follows the demise of the 100% subprime business.

    Hope this helps

  7. Reply
    Ron B
    February 6, 2014 at 10:23 am

    It is due to a back log of forclosures that should have happened already. There are always going to be some people that run into circumstances that thay can not make house payments. Over the last 5 years equity was building so fast these people just took cash from thier homes and delayed the process. Now the value is no longer there for the to draw on so we are seeing all of them get into trouble at the same time.
    The tightened restrictions on loans does not help, because it keeps people from buying these houses and thus bailing out the problemed person.

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