There are people who are sitting around deciding who is responsible for the subprime mortgage crisis, but are also many who are struggling to find out the effects of the subprime mortgage on the banks. Many consumers are surprised of the impact and consequences of this process. From the US subprime mortgage crisis is a lot to learn and for that reason these lessons should be analyzed and used to avoid such disastrous situations.
Most people do not understand is the fact that the US subprime mortgage crisis goes beyond home ownership. For example, the process affects also other financial areas as the mutual fund which are slowed down by mortgages or homeowners who have not the possibility to pay higher payments and are forced to default on their auto loans, home or even on their credit cards too. Some owners are in the position of not being able to pay their bills due to the increasing of the interest rate and their budgets are not covering these changes. Therefore, financial institutions and many banks are left to find ways to produce money because many homeowners who are hit by the subprime mortgage huricane are affecting their limited budget.
One important effect of the US subprime mortgage crisis is the dramatically decrease of the guidelines which helped the consumers. Some time ago it was easy to receive a credit card, home loan or an auto loan, but unfortunately the level of loans which are going into default has increased and the banks are getting more and more difficult to convince to offer loans to borrowers regardless of their problems. It is very hard for those who are considering to buy a home or to get a mortgage loan of any kind because they are cutting into the income of the banks.
Problems like subprime mortgage and its danger towards banks were never taken very seriously. Most thought that the housing crisis would not explode soon, but when it did everyone was shocked by the great number of consumers which became unable to fulfill their payments. Although this situation could have been avoided, unfortunately has trapped many consumers and even banks. Ironically, the lessons taught from US subprime mortgage are very useful, but if not used when needed, are left and considered as only theory.
The consequences of this process can also be noticed in the lenders tactics, especially by their increase in requirements and watchful eyes when establishing and checking the fulfillment of those requirements. For this reason now it is harder to purchase a house than before. The lending practices are going to unfasten in time, but it is highly probable to take a while until then. Many buyers will have a rough time until the lending practices will recover. By all means, the US subprime mortgage crisis has hit most consumers and in a bad way. The key is to keep struggling and try to find solutions as soon as possible. There are many programs which offer you good assistance in this area.
Slowing foreclosures have given a spark of optimism to investors on Wall Street who see the trend beginning to slow down. For the last year the foreclosure rate has steadily risen month by month over the previous year's month of foreclosures causing speculation of a continued trend in homeowner foreclosure rates. RealtyTrac, an online marketer of foreclosure properties, said ?that foreclosures fell to a 5% increase from a 6% increase in foreclosures the previous year? causing speculation of brighter days.
However, foreclosures continue to rise they are just doing so at a slower rate. On Capitol Hill the politicians are working feverishly to come up with legislation to slow this rate even more, but they seem oblivious to is the underlying problem that is causing the foreclosures. Ignoring the sickness and treating the symptoms is a sure way for the disease to spread. What they appear to have ignored is that these hybrid loans were not exclusive to low income borrowers with bad credit which is not the situation at all.
By in large the first wave of foreclosures has come and gone primarily affecting low income borrowers with poor credit. For the most part these borrowers were bought homes or refinanced into 2 year ARM's (adjustable rate mortgages). However, there is another wave of foreclosures coming and it's a tsunami that will affect the middle and upper-middle class of borrowers and deliver a one-two punch to reeling lenders. According to Keith Carson, with TransUnion's financial services the foreclosure rate is trending towards the higher end neighborhoods that were seemingly immune to the first wave of foreclosures.
Self employed borrowers with good credit are responsible for almost as many of the ?sub-prime? loans as the latter. These loans were made to people with good credit but needed a riskier loan that conventional mortgage lenders would not make, the subprime loan. These loans are called stated income loans and do not require the borrower to prove their income, only that they have income. These loans are common practice for self employed business owners who can rarely show their full income on their tax returns due to deductions and depreciation.
Due in part to increased credit score requirements these loans have been almost as stable as the prime loans that were backed by Fannie and Freddie, the Nation's number one and number two purchasers of mortgages. The problem is that the smaller lenders that do not lend their own money but instead buy and sell loans as a commodity began lowering the guidelines during the refi boom to compete for loans. Eroded underwriting guidelines on portfolio loans made it possible for stated income borrowers with good credit to purchase expensive homes with no money down. This is the riskiest loan a lender can make because the borrower doesn't have an investment in the property and can easily walk away from it in stormy waters.
Meet the next wave or foreclosures. These are middle to upper class business owners in expensive houses that have mortgages that are about to adjust or already have. These homeowners held on by the skin of their teeth during the first wave of foreclosures but are looking at rough seas ahead. These borrowers are now in homes they probably can't afford due to the economic slow-down and have little reason to continue paying on an asset that is worth less than they owe money on. Add to the mix looming legislation that will prevent them from refinancing out of these adjustable rate mortgages foreclosure becomes the most viable option.
Most, if not all legislation aimed at ?bailing out? the mortgage market offers borrowers strong recourse against lenders that loan money to people who cannot afford the home. This liability will bring stated income loans to a screeching halt. This sounds like good legislation on the surface it but doesn't address the underlying problem that is about to hit us. If self employed borrowers cannot prove their income because of legal tax deductions and they cannot get another loan to pull their selves out of their adjustable mortgage what can they do?
There are over a million self employed small business owners that have mortgages. A large percentage of these borrowers cannot and did not prove enough when taking out a mortgage. An equally large percentage of these borrowers are in adjustable rate mortgages that are common to stated income borrowers to offset the higher rates. These loans were born out of necessity and served a good purpose until they were abused by portfolio lenders.
The problem is the income and the tax deductions that self employed borrowers have to take to operate in the black. These deductions cause their tax returns to show virtually no income after the deductions. We can't ask these business owners to not take these deductions can we? This will close thousands of small businesses and cause economic havoc on too many levels to count. We cannot ignore a million people the ability to buy homes can we? The answer is in the underwriting.
As most everything, the devil is in the details. Long gone are the days of actual underwriters looking at all of the documents and making common sense decisions on would-be borrowers. In the age of automated underwriting where lenders and brokers plug in the numbers, assets credit scores and documentation type into the computer and the program spits out an approval. There is only one large agency that still makes common sense decisions on loans and that is Uncle Sam, FHA, ironically the agency that will end up bailing everyone out.
The only problem is that they do not do ?stated? income loans, which is why they are solvent. They hold mortgage holders to a moderately strict debt to income ratio that can only be proven by tax returns and w2 statements. This excludes our self employed borrowers who have to write their income off to make a living. However one thing could be done to fix this problem. Banks and underwriters could calculate their income ratios from the gross amount on the taxes instead of the gross adjusted (after deductions) and make a common sense decision like they do with w2 wage earners.
This move would require that banks and lenders begin to employ real loan officers and underwriters and empower them to make lending decisions. Not commission junkies and high cost secretaries that have computer guidelines memorized and little authority to deviate from what the computer program tells them to do. This would actually put lending back into the hands of professional bankers that know their business.
Instead, legislators are determined to change the rules right now that affect the retail end of the market in essence throwing the car in park at 60 miles an hour. This crisis did not happen overnight and it will not be solved with one piece of legislature overnight. Changing the rules mid game will only perpetuate the crisis and punish a lot of Americans who were playing by the rules. It began with a failure in fundamentals and it will end by repairing them. A gradual change with a grace period for current homeowners is the only way to usurp the next wave of foreclosures, it's the income.
Both Dana B. Smith & Aubrey Clark are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Aubrey Clark has sinced written about articles on various topics from Credit Cards, Home loans and Finances. Aubrey Clark is a writer and editor for Lendfast.com and lives in Atlanta Georgia with his wife and four children. He writes primarily on financial matters pertaining to