SubPrime Mortgage Storm Clouds
By Elizabeth Dougherty
What in blazes is going on in the mortgage
industry?
Day after day, there are headlines about
“subprime” mortgage market problems and
the impact on the national economy.
Politicians make speeches and point
fingers. Presidential hopeful Senator Dodd
accused federal regulators of being “asleep at
the switch.”
The media is using ugly words like
“crisis”, “scandal” and “recession.”
Banks and mortgage companies are
calling it a “correction.” They state that a
few overly aggressive mortgage brokerage
companies may go under, but that the large
banks and mortgage lenders can easily afford
the temporary loss in business.
This week Federal Reserve Chairman
Ben Bernanke told the nation that the impact
of the subprime mortgage problem on the
economy seems likely “to be contained.”
The Real Questions
What is subprime? What happened?
What about you?
Subprime
Just as it sounds, subprime borrowers are
those with serious credit issues. These are not
borrowers that missed a payment or two on
their Visa or had hospital bills to pay off.
What Happened?
A few years ago, mortgage companies
designed mortgage products to help
“subprime” borrowers purchase homes or refinance existing properties. Often, these would
be adjustable rate mortgages with lower rates
for the first few years. Income qualifying was
easier and the market exploded.
Some companies got overly aggressive in
their marketing and less strict with their underwriting
guidelines. Mega-profits were made
by being ultra aggressive in making subprime
loans and then selling them to the big banks
like Chase, Morgan Stanley or HSBC.
As an example one loan, the “NINJA
- no income, no job, no assets” would get you
a mortgage even with credit issues.
Larger Companies
No surprise, some of these loans went
into default. Larger lenders were prepared.
As an example, in 2006 GMAC’s mortgage
subsidiary ResCap tucked $1.9 BILLION off to
the side, just in case a few loans went bad.
(This was only 2% of their loan volume.) Some
did and ResCap wrote off about $600 million.
They kept the other $1.3 BILLION in reserves
and made a net profit of about $200 million.
You would think they would be happy,
but they were not. The year before they had
made a profit of $1 BILLION. Now there is
gnashing of teeth, announcements of some
job layoffs and the sacrificial resignation of
a few executives. Don’t feel too sorry for
ResCap. They still have $2 BILLION in cash and
a more than $7 BILLION equity base.
Hot Potatoes
Then there were overly aggressive
brokerage companies, like New Century, that
originated mortgages and immediately “sold”
them (or securitized them) to financial giants
like Credit Suisse and Morgan Stanley. Financial
giants don’t get that way by being stupid,
and insisted that New Century agree to buy
back any loans that went into default quickly.
As the loans went bad, Morgan Stanley started
throwing the “hot potatoes” back at New
Century. Unprepared to repurchase so many
loans, the word spread and banks cut off their
credit lines. Morgan Stanley is auctioning off
about $2.5 Billion of New Century mortgages
and New Century is a soon-to-be-bankrupt
former mortgage broker.
You
What does this have to do with you and
your mortgage application?
Not much. Alabama is not one of the top
subprime markets, although the same cannot
be said for Texas, Florida and California.
Also, the mortgage industry is financially
sound. Rates are still good. The Fed is stepping
in with reassurances. Prime loans are virtually
unaffected and subprime loans will have some
tighter (and more realistic) guidelines.
There are headlines and speeches, then
there is reality. There will be some minor
national turbulence, but here in Lee County it
is still clear sailing. The market here has been,
and will continue to be, a favorable one for
borrowers trying to obtain financing.
Elizabeth Dougherty, a resident of
Auburn, is a former Real Estate Broker
and Mortage Broker. She can be
reached at EADougherty1@aol.com.
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