Get Blog Updates on your iGoogle homepage:
| New Research Sheds More Light on Subprime’s Impact |
| Written by Jonathan Smoke | |
| 12.04.2007 | |
|
Discuss this article on the forums. (0 posts) The lead article on the front page of yesterday’s Wall Street Journal debunked the misconception that only those with poor or limited credit hold subprime mortgages. Whether people wanted the convenience of avoiding documenting income or made decisions based on aggressive and potentially fraudulent -- or at least unethical -- mortgage brokering, a large number of people who could have had prime mortgages ended up in subprime mortgages during this decade. WSJ.com has a great interactive chart available to the public. It highlights the stats and shows that more than borrowers with bad credit used subprime mortgages to finance home purchases or refinances at the height of the subprime peak.  Also yesterday, Eric Rosengren, President of the Boston Federal Reserve Bank gave a speech highlighting recent research by the Boston Fed. Two important points Rosengren made were that 20% of subprime mortgages made were to households who could have qualified for much better mortgages; and rising home prices and an abundance of financing together provided the safety valve exit from these products in the form of refinancing.Now, those conditions have reversed—financing options have dried up and home prices in many areas have been in decline. For more on the speech, go to our real estate news section. To see the full working paper from the Boston Fed, go to this link. What does this research suggest? You can’t paint the current crisis with a single brush. While there are home buyers who used subprime mortgages as their only way to get into homes, others had, and presumably still have, options. So it is possible that if their equity hasn’t disappeared and their credit hasn’t diminished, these better-situated households can refinance into better mortgages. But for those for whom subprime was the only option, what now? Part of the issue stems from rate resets on these mortgages, but as Rosengren said in his speech yesterday, “The teaser rate was not particularly low – nationally, the average rate on a 2006 subprime 2/28 mortgage was 8.5 percent.”
The issue with many of these buyers fundamentally is that they could not afford a home or the type of home they purchased given their credit. Borrowers who used subprime mortgages played a form of Russian Roulette, and as home prices vaulted forward earlier this decade, new bullets were never put into the revolver. With home prices falling, the revolver and chamber are full. Will political efforts to bail these home buyers out help or hurt? Time will tell. 
We're always looking for feedback from our readers.
|
| < Prev | Next > |
|---|
