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Property and Sub-Prime Loans
Homeowner’s Disaster: Many homes in America are becoming foreclosed. Kicking families out and putting more people homeless then ever before. The main cause for these problems is the Sub-Prime loan. These loans were meant for people with poor credit or without enough revenue to qualify for cheaper loans. Over 2.4 million people all over the country are in danger of losing their homes because they are incapable of making payments or refinance high-cost sub-prime loans they took out between 1998 and 2006, according to the Center for Responsible Lending. This is becoming a huge problem in America because many American’s are going into debt and declaring bankruptcy. I think the government should stop wasting money on foreign affairs and help the people her in our country.
Lenders made these sub-prime loans to help out borrower who can’t afford to buy a house or have bad credit. At first it seems like it was giving these people a better life or a second chance. Now its just the opposite, these people are suffering more and losing everything they have because they took out loans with low initial rates, an now struggle to pay their payments. So Say someone buys a house and wants to pay like $900 a month, but can easily afford $1000 to $1200. They are pretty much screwing themselves over because the interest rates go up higher and higher, which ends up being more then they can afford. Charles E. Schumer states, these loans are going to cause a huge economic collapse (Hennessy Fiske). He also states that, “As sub-prime mortgage lenders scramble to protect their bottom lines, we need to redouble efforts to protect American families and communities who are at the losing end of this mess. The sub-prime mortgage meltdown has economic consequences that will ripple through our communities unless we act.”
There are three primary risks with these sub prime loans. The first risk is credit risk. Usually, the risk of default would be assumed by the bank starting the loan. However, due to security changes, credit risk is now shared more generally with investors. This is because the rights to these mortgage payments have been remade into a variety of complex investment securities, generally categorized as Mortgage-backed securities (MBS) or collateralized debt obligations (CDO). A CDO, essentially, is a remaking of existing debt, and in recent years MBS collateral has made up a large proportion of issuance. In exchange for buying the MBS, third-party investors receive a claim on the mortgage assets, which become collateral in the event of default.
The second risk is Asset Price Risk. Most CDOs require that a number of tests be fulfilled on a occasional basis, such as tests of interest cash flows, collateral ratings, or market values. Because the ability of sub-prime and lower-quality mortgage homeowners have to pay is now in question, the value of the mortgage asset may be reduced suddenly. For deals with market value tests, if the valuation goes below certain levels, the CDO may be required by its terms to sell collateral in a short period of time, often at a large loss.
The third risk is Liquidity risk. A related risk involves the commercial paper market, a key source of funds for many companies. Companies called structured investment vehicles (SIV) often obtain short-term loans by issuing commercial paper, promising mortgage assets or CDO as collateral. Shareholders provide money in exchange for the commercial paper, getting money-market interest rates. However, because of concerns regarding the cost of the mortgage asset collateral linked to sub-prime loans, the ability of many companies to issue such paper has been significantly affected. In addition, the interest rate charged by investors to provide loans for commercial paper has gone up some what above historical levels.
According to a study by Michael Youngblood, director of fixed- income research at FBR Investment Management, found no proof that standards had tightened for sub- prime loans this year, despite a huge increase in defaults that started late in 2006 (Reckard). “It really is astonishing,” states Youngblood, “It’s as if the lesson of the past two years were ignored in early 2007.”
The cost of homes is the problem. To be capable to pay off the monthly payments, several home buyers have turned to adjustable- rate mortgages, to interest-only mortgages. 37% of all Adjustable-rate-mortgages last year were interest-only. Also their were payment-option loans, which was only 10%. These were the numbers in mid-2006. Susan C. Kaeting, chief executive of the National Foundation of Credit Counseling states, clients are upside down economically (Tedeschi).
You can get expert help with your essays right now. Find out more...Many homeowners chip away at their home equity, but a small number of people are doing the opposite, they are paying off their mortgage quicker then lenders require. Is ending a mortgage faster then needed a wise choice? There is no simple answer. Financial advisers disagree about this choice. Assume that the homeowner has a 6.25 percent fixed-rate mortgage and is in the 20 percent income-tax bracket, the net interest rate is about 4 percent. Although homeowners would save that 4 percent by paying off their mortgages, they would earn more then 4 percent if they invested the money instead.
The major effect that all these loans are giving to people of course is debt and then bankruptcy. In a survey taken last year the average person receiving financial advice before filing for bankruptcy in the last year earned $27000 yearly and had $38500 of unsecured debt spread over eight credit cards. So obviously those considering bankruptcy are those who have debt well over their annual income. Chief executive of the National Foundation for Credit Counseling, Susan C. Kaeting states “Mortgage debt is coming out as much more significant then we expected, pull this all together with other unsecured debt people have, and this is really problematic. Kaeting also notes that 98% of clients who get foreclosure-prevention tutoring from a foundation counselor ultimately stay away from foreclosure.
According to Craig Focardi, an analyst with TowerGroup, a financial industry consulting firm, federal bankruptcy laws passed in 2005 could help make it less. Focardi said that under new bankruptcy law, secured creditors like mortgage lenders “have to share more of a debtor’s income with credit card, automobile and other consumer lenders that hope to increase collection recoveries” in a bankruptcy proceeding. “Under the new law its harder for borrowers to file chapter 7, which enables them to extinguish their debt,” Focardi said,” Instead, they have to set up repayment plans even for credit cards. So it lengthens the amount of time borrowers are delinquent on their mortgages and could increase the lender’s total loss on that defaulted loan.”
Is there a light at the end of the tunnel? Homeownership may keep on going down its windy slope for a while so whatever you do, get professional guidance and choose a licensed agent you can trust. He will listen carefully to your needs and get you the best rates obtainable while providing you with the details and helpful opinion about your mortgage or refinancing needs.
Many articles have been written for homeowners with these exploding adjustable-rate mortgages advising them to get in touch with their lender and try to renegotiate for an addition of the old payment for one or two more years. Based on a limited but valid number of situations the banks have not revealed much notice in renegotiating the term of the payments. In this situation a homeowner is faced with a foreclosure and walking away from their home or placing their home on the market and attempting to do a short sale, which is when the seller asks the bank to accept less than a complete pay off on the mortgage.
So in conclusion, the best thing to do is to talk to a professional who knows what he is doing. Another thing that could be done is if you’re earning $30,000 annually you might not want to buy a house. It would be better to rent an apartment. What I am trying to say is if you can’t afford the house don’t buy it. Only buy what you can afford, money does not grow on trees, and unfortunately not everyone is rich. There is also plenty of help out there everywhere there are plenty of foundations and groups, like the Center for Responsible Lending, who wants to ensure that any rescue plan was aimed at homeowners and not banks or other mortgage companies (Hennessy-Fiske).
Heavens, Alan J.. "Unwelcome trend seen in housing affordability." The Philadelphia Enquirer 16 30 July 2006, pg. JO2
Hennessy-Fiske, Molly. "The Mortgage Meltdown; Lawmakers propose aid for borrowers; Democrats in Congress seek hundreds of millions of dollars to forestall foreclosures." LA Times 12 April 2007, home ed.: pg. C-1.
Mortgage meltdown, 2 October 2007. St. Petersburg Times. 19 Nov 2007 http://library.duke.edu/research/citing/workscited/webpage.html
Principles for the management of credit risk, Bank for International settlements. July 1999. http://www.bis.org/publ/bcbs54.htm
Reckard, E. Scott. "Mortgages; Lenders slow to raise home loan standards LATimes" 5 Oct 2007, home ed.: pg. C-1
Tedeschi, Bob. "A Growin Burden of Home Debt." New York Times 5 November 2006, late ed.: pg. 11-1
Tedeschi, Bob. "Is paying off a loan a good idea?" New York Times 18 March 2007late ed.: pg 11-4.
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