By Jesse Herman, contributing editor
Non prime mortgage loans are suffering and are bringing down many who were closely associated with it. With Wall Street demanding repurchases from subprime lenders, the mortgage default battles have lead to lenders going bankrupt or swallowing massive losses.
Prime and non-prime lenders are increasing minimum payments and reducing the max loan price. Low start loans are a dying breed despite not-long-ago accounting for a huge chunk of the mortgage industry.
The extinction of Option ARM
Right now trailblazers are licking their chops at the prospect of buying homes for cheap and lenders are salivating (even more) over the opportunity to finance someone with good credit. Lenders will draw up fancy high default products and borrowers will open their hands.
Additionally, current low interest rates could encourage borrowers to lock into a fixed period rather than "drift" with a product such as a monthly adjustable mortgage rate.
Statistics Indicate Change
Check out the ResCap/GMAC Financial Services comprehensive study of their portfolio in comparing 2006 underwriting guidelines to that of 2007.
What the new ResCap/GMAC guidelines effectively eliminated
- 58% of subprime loans
- 35% of 2nd's
- 20% of Alt-A
These numbers are eye-popping and if accurate, indicate dramatic change. This may or may not reflect new guidelines changes by other companies, but in the coming months we should have that answer.
The Resurrection
Many people are saying the non prime lender backlash has been overstated. That publishing article titles such as "Are Option ARMs Dead" is irresponsible and are simply looking for readers- thus making the subprime mortgage issue to be a bigger deal than it actually is. There may be some truth to this.
While the abuse of the mortgage industry has been stunning, non prime mortgages were never intended to be granted to people who could not afford to buy homes. Lenders are going to lie low for awhile, but they will reappear soon enough. Meanwhile, builders will continue to build new homes and borrowers will be looking hard to buy.
At what rate and price people buy is still unknown. Those who survive will adapt to stricter standards and the mortgage industry will move on, while looking back at what may be just another bump in the road. Then, in time, some lenders and mortgage brokers will find ways to push new standards to their limit.
Nothing is going to die. It just may look different.
