A Word on the Subprime Market From a Local Tucson Loan Consultant

We all know about the collapse of the sub-prime market and the tidal wave effect it has had on the mortgage industry as a whole. Here is a brief synopsis. Over the last few years, Wall Street investors had fallen in love with the returns on sub-prime (lower credit ratings) mortgages. They paid a premium for these loans in large quantities. The demand of this sort of product in turn induced the lenders to lower their underwriting standards and make more of these loans.

After these portfolios started to mature, the true rates of delinquencies and losses was recognized to be higher than predicted. Aside from having homeowners who were never financially qualified, buyers were put into risky loans such as option ARMs that they did not entirely understand. At this time, the investors started buying these loans at a discounted rate instead of a premium because of the increased risk associated with these securities. The lenders would package thousands of these loans for some period of time and all of a sudden they had to pay to get rid of the loans in order to replenish their credit lines.

It gets worse - Most lenders use what are called “Warehouse” lines of credit to make their loans. As Wall Street recognized the error or their ways, the banks and investment houses that had established these credit lines with the mortgage lenders started making “margin calls”. This is a demand to pay down the line of credit in a given time frame. A mortgage lender could have a $20 million line of credit with a bank. The bank could believe that the collateral is only worth $18.5 million and require a payment of $1.5 million in the next 14 working days. And then every other creditor will want their line paid down as well so as not to be the most exposed party to one portfolio. You can see where the combination of cash expenditures spelled doom for mortgage lenders. But, these lenders did this to themselves. Unfortunately, there are also a huge bunch of folks out there that can’t sell their homes because prices have dropped and they can’t refinance because the lenders are requiring better credit and more equity.

Where are we now?

Rates are still good for people with good credit. “Piggyback” loans (2nd mortgages) are going away. This means that people with little or no money down will most likely have to pay Private Mortgage Insurance (PMI) in order to get a loan. This protects the lender if the house is foreclosed upon and the amount from the sale of the home is less than the balance on the note.

What may be coming?

This is difficult to predict. I anticipate that home prices will continue to go down for the next 12-18 months. There will be a high delinquency and foreclosure rate. Mortgage lenders will have to rethink their business models in order to protect their cash positions and stay solvent and lastly I would anticipate more government regulation in the industry in regards to educating the customer and protecting them from risky loan products and unscrupulous lenders.

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Patrick Randles is a guest contributor to Tucson REblog and gives an insider’s view on the mortgage industry. He is a Mortgage Loan Consultant with El Conquistador Mortgage in Tucson, Arizona. Patrick can be contacted by phone (520-850-7485) or email. Feel free to post any questions for Patrick!

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