Investors, Lenders (Finally) Worried about Risky Loans
by Foreclosure-Fighter staff writer
Even as federal and local governments begin to acknowledge the foreclosure crisis sweeping the nation and enacting legislation to help patch up the tears foreclosure is creating in the lives of many Americans, mortgage lenders are apparently taking less notice of the problems than expected.
The New York Times recently reported on a study done by the Freidman, Billings, Ramsey Group (FBR Group) on the default rates of mortgage loans originated in 2007. The results, unfortunately, suggest that things are going to get worse for homeowners and borrowers before they get better, according to the Times.
Reports show that as recently as last summer, analysts were worried because default rates on subprime mortgages were higher than ever before in the history of the industry. By August of '06, 5.36% of loans borrowed in that year had already reset, indicate sources. This was an unusually high rate at the time.
By August of this year, though, a whopping 8.05% of loans originated in 2007 had already reset, according to reports.
Analysts apparently attribute this increase to mortgage lending practices: even though data on subprime loans showed risky default rates, many of the country's biggest lenders (Countrywide, Moody's, Standard & Poor's) continued practicing lax lending standards until this summer.
Reports show that most of the major lenders have begun enforcing stricter lending standards since this summer, but analysts believe that foreclosure and other problems caused by high default rates and quick resets will take some time to taper off.
Many homeowners are now familiar with a typical cause of foreclosure: During the housing boom, they signed up for an adjustable rate mortgage, assured that they could refinance or sell the property when rates got too high for their incomes. Then, when home prices stagnated and began to fall, they were unable to refinance or sell, the mortgage payments reset, and they were facing foreclosure.
And families renting properties that have been foreclosed on, reports the Boston Globe, are often evicted even if they've regularly paid their rent on time.
In addition to the strain on individual families the housing slump has caused, many state's economies are reportedly suffering as workers in the lending and real estate industries lose their jobs.
Adjustable Rate Mortgages and speculative subprime loans have proven unsustainable and unrealistic for a market no longer enjoying ever-increasing property values, the FBR study suggests, and investors are (finally) beginning to take note of that.
Another study, conducted by the Federal Reserve Bank of Atlanta, suggests that new lending practices set many families up for foreclosure. By requiring little or no down payment, lenders attracted homebuyers who wouldn't have been able to purchase properties with more traditional loans. But that led to problems.
Reports indicate that many of the country's major lenders are now demanding proof of income and only offering 80-90% of home values in loans-practices that some would argue should have been in place all along. These measures will ensure that families will not be given loans that would prove impossible or unreasonably difficult to repay based on their financial means.
The FBR study determined that the value of outstanding loans in the United States amounts to $10.6 trillion-probably a major factor in Wall Street's recent increased wariness about investing in riskier loans. Reports show, in fact, that Wall Street had securitized 33% fewer subprime loans in the first eight months of 2007 than in the same period a year before.
While some of these statistics may seem worrisome to homeowners, the overall message-that investors and lenders are starting to act with much greater caution-should provide some level of relief.