| iv> | | | | That family could not make enough money to |
| Why is there a Sub-prime meltdown? Sub-prime | | | | afford their first home. And they were being |
| loans are only 1% of total mortgages, so what's | | | | induced into purchasing homes that were in the |
| the problem? | | | | $500,000 and $600,000.00 range. First time home |
| In this article I am going to try and explain in very | | | | owners don’t normally buy a half a million |
| plain terms what happened and how, with the | | | | dollar house as a starter home. But that’s |
| subprime meltdown. In the 1990’s | | | | exactly what was going on in this crazy market. |
| home ownership rates were fairly stagnant. In an | | | | Many new immigrants to this country were also |
| effort to extend its business and in response to | | | | getting in on the home ownership game, both |
| the federal mandate to open up housing to more | | | | legal and illegal. It’s a fact that the fastest |
| Americans, the mortgage industry created loans | | | | growing segment of the housing market from |
| with looser guidelines for credit and income | | | | about 1995 to 2006 was the Hispanic market. And |
| qualification. Also interest rates were at their | | | | they were primarily buying homes with ZERO |
| lowest in recent history, which made home buying | | | | down, and ZERO income verification. I know this |
| more affordable to more people. Demand for | | | | because I was there and saw it first hand. Many |
| homes began to grow exponentially. | | | | of the loans they were getting were ARMS and |
| More mortgage products became available. There | | | | negative amortization loans. I know because I was |
| was a dramatic increase in adjustable rate | | | | there. |
| mortgages such as the payment choice arm | | | | So what happened? I call it the perfect storm. All |
| or negative amortization arm loans. In addition | | | | of a sudden, the lenders started to change the |
| to this there was the advent of | | | | guidelines. Someone started to wake up and |
| computer-automated underwriting which relied | | | | realize that what was going on was crazy. Many |
| more on the credit score of the borrower. No | | | | of these loans were, 1. Fraudulent, 2. High risk and |
| money down programs became much more | | | | 3. Bad lending practices. I don’t know |
| prevalent and available to borrowers with lower | | | | whom was the first to start to realizing this, but |
| credit scores. Income documentation became less | | | | some one was starting to smell the coffee. And it |
| a qualifying factor in determining ability to repay | | | | didn’t smell real good. So there was a slow |
| loans. It was boom times baby! In addition to this, | | | | down in the demand for homes. People realized |
| many people started to see their home values | | | | they really couldn’t afford to own a |
| increase at unprecedented rates because of the | | | | $600,000.00 home while working at a McDonalds, |
| high demand. Some communities saw values go | | | | and drive a BMW and make trips to Punta Cana. |
| up over 35% in a year. Normal home appreciation | | | | As the demand for homes started to subside, |
| is usually between 5 and 6% on average | | | | people who had negative amortizing loans and |
| nationally. | | | | adjustable rate mortgage started to see their |
| Because of the unprecedented growth in the | | | | payments increase. And guess what they |
| capacity of people to get loans, many new loan | | | | couldn’t afford that home any longer. Many |
| officers and mortgage companies came into the | | | | of these new borrowers were calling their loan |
| market. Some of these loan officers were | | | | officers who had told them, Don’t |
| untrained and uninformed about the mortgage | | | | worry, I will refinance you in a year so you wont |
| business. Some were just crooks looking for the | | | | have to pay the higher payment or |
| next get rich quick scheme. | | | | Don’t pay attention to the 30 year |
| Meanwhile on Wall Street, there was a strong | | | | payment, your payment is only $1,600.00 for this |
| appetite for mortgage backed securities as | | | | $600,000.00 home. Many realtors were |
| investment vehicles. Home owners may be dimly | | | | complicit in this marketing as well. Many of them |
| aware that their mortgage is held by someone | | | | didn’t really care that the buyer was a |
| other than the bank that lent them the money. | | | | dishwasher, married to a busboy buying that |
| Many Wall Street investment houses started | | | | house. So now that family is busted. The wife and |
| making a lot of money from these new | | | | the husband are arguing because they |
| mortgage backed securities and were demanding | | | | can’t afford to pay the bills anymore. The |
| more. The ratings company’s that rate | | | | cousin that moved in with them to help them has |
| bonds and securities were giving these | | | | decided to leave and get his/her own place now. |
| investments AAA ratings. Lenders barley could | | | | And since they can’t afford the home |
| keep up with the demand for these high | | | | anymore they just walk away. They really |
| quality investments. The common sense | | | | don’t loose much since they didn’t |
| lending rules which had for so long governed the | | | | put money down to purchase it anyway. |
| lending world were being cast aside. Practically | | | | This, sadly, is the reality of what has caused this |
| anyone with the desire to own a home could buy. | | | | mortgage meltdown. It’s the same story |
| Investors were getting 100% financing to buy | | | | that has caused many to loose their lives, yes I |
| investment homes that they could then flip over | | | | said their lives. Greed! Greed and jealousy are the |
| to another purchaser and because the values | | | | culprits. They are the demons that possessed the |
| were increasing so rapidly, make a few thousand | | | | mortgage market and as a result brought about |
| dollars on the flip. Builders were putting up new | | | | this demise. But is it really demise or is it a return |
| homes so fast that at one time the Gypsum | | | | to normalcy? I personally think it’s the |
| company worried about running out of the raw | | | | latter. |
| resources necessary for manufacturing their | | | | So what happens next? What does normal lending |
| products. It was the gold rush all over again. And | | | | look like? I’ll tell you this; it doesn’t |
| homes were getting more and more expensive. | | | | look anything like what you have seen in the |
| Left behind was the low to middle income family. | | | | recent past. More to come soon. |