Lackadaisical Financing Exacerbates Housing, Mortgage Woes

Heiko D. Wijnholds, a professor of marketing at the Virginia Commonwealth University’s School of Business and a Richmond Times-Dispatch columnist, writes that after its record binge, the U.S. housing market is suffering from a massive hangover.

Not only are home sales and prices taking a hit, Wijnholds writes, but the most vulnerable part of the market is unraveling.

Low interest rates and large sums of available funds initially fueled the housing boom. This latest problem, however, is the result of the lax and permissive way in which both home purchase loan and refinancings have been financed.

Nowhere has this approach been more insidious than in the case of those borrowers who are unable to meet minimum financial requirements for an ordinary mortgage loan. They represent the so-called subprime market.

As long as house prices were increasing at a brisk pace, home loans made to these sub-par borrowers presented little risk for the lenders. After all, the borrower’s equity was continuously gaining in value.

This led to increasingly lax financing requirements, including low- or no-interest “teaser” loans and “liar” loans that required no documentation.

But the market tide has turned, and prices and equity values are falling, or at least not rising.

That is leaving some subprime borrowers high and dry, without enough liquid funds to pay the higher payments when their low teaser rate expires.

Nor can they qualify for a mortgage refinance at new low rates because low prices are eroding or wiping out the equity stakes in their homes.

The result is that such borrowers are forced to sell in an unfavorable market or to walk away from their houses. Foreclosures of such home loans are increasing at a significant rate. What makes this worse is that most of these borrowers are poor and many are black.

This has created a politically sensitive issue. No wonder Congress and politicians are now getting involved. The blame game is on, and there is plenty to go around.

The mortgage lenders are the prime targets, but since most of them abided by the existing regulations, they are in the clear, at least legally, if not morally.

Also, they can argue that they are operating in a free, competitive market for a sizeable piece of the market.

The next target is the regulators.

The problem for the federal banking regulators is that they can exercise direct or indirect supervision over only about half of the subprime market. The rest of these mortgages were originated by non-traditional, independent lenders or mortgage brokers licensed by the states.

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