Any subject can seem a bit ho hum when it suffers from overexposure in the media, such as the subprime mortgage saturation in recent weeks. In the case of subprime mortgages, the recent coverage is definitely deserving of our attention.
High interest rates have historically been the chief nemesis of the housing industry. Interest rate cycles have taken enormous bites out of property values and real estate activity in previously years. Rising rates left large inventories of both existing and new homes. When mortgage rates fell potential homeowners waiting in the wings stepped forward to income qualify for and purchase homes and the housing market subsequently returned to healthy activity and growth.
However, today's housing situation gives cause for real concern.
First, interest rates continue to hover at historically low levels. Rates are not placing qualified buyers on hold nor have rates driven them away.
Second, when buyers became scarce rather than allowing the housing market cool off naturally lenders tweaked with income, credit and debt-to-income and loan-to-value ratios and created a firestorm of at best marginally qualified buyers, accelerating housing prices to unsustainable heights.
Now that the smoke is clearing, no one likes the landscape; not real estate brokers and agents, not mortgage lenders and brokers, not builders or the trades and supporting industries and certainly not Washington.
It is imperative that we identify the root cause of today's housing market retreat and address those problems. Let's not cast too broad a blame to further harm the industry or jeopardize its healthy recovery by destroying a key solution - subprime mortgages.
Data from the Mortgage Bankers Association (MBA) shows that delinquency rates are steadily climbing on more than 40 million first mortgages.
Data from the MBA and LoanPerformance show that delinquency rates on subprime first liens are much higher than on subprime second liens. It is estimated that the largest portion of subprime second liens consists of borrowers whose first mortgages are classified as prime. According to Moody's Economy.com, "This suggests very lax underwriting standards on subprime first mortgages, and perhaps even some predatory lending."
Given the climate within the housing industry and in Washington, considerable energy is being devoted to identify what is at the core of the housing implosion, what measures can be taken to ease the negative economic impact and what additional measures are needed to better assure a non-repeat. We can only hope that prescription doesn’t exacerbate the conditions.
