Editorial: Mortgage Lending On the Brink
Those of you old enough to be a part of the baby boom generation - or older - know how hard it was to get a home loan. A bad credit rating was the kiss of death. You may have had to have a parent co-sign your first loan.
If you did get the home loan, one thing was clear: The mortgage lender was confident you could afford it.
That’s not always the case today.
With growing competition among mortgage lenders and a shrinking pool of customers, the qualifications for borrowing hundreds of thousands dollars have loosened.
There is even a second tier - subprime, or bad credit mortgage loans - for those with shaky finances and bad credit ratings. If the loans fail, the homeowner goes bankrupt and the lender gets the house.
Major lending institutions, like banks, are held to higher standards, but some fly-by-night mortgage lender organizations have sprung up to take advantage of an emerging market.
With the primary market pretty well absorbed, the emerging market consists of those people who have bad credit ratings or are unable to make a down payment - often African Americans and Hispanics lured by enticing adjustable-rate mortgages.
According to the Harvard Joint Center for Housing Studies, minorities accounted for 49 percent of the housing boom from 1995 to 2005.
It isn’t hard to guess what happened. Once the teaser rate expires, many owners were forced to pay higher market rates they couldn’t afford. Subprime / bad credit home loan borrowers fell behind in trying to make payments at the highest rates in four years.
Not only did thousands of people ruin whatever credit report they had, but home mortgage lenders were forced to close. More than 5,000 people lost their jobs when Ameriquest Mortgage closed.
Some analysts say the subprime mortgages are just the tip of the iceberg, and that qualified lenders could also be in trouble when rates adjust to a higher level.
A massive delinquency rate would have a major impact on the economy. Recall the savings and loan scandal in the early 1990s?
The deregulation of the thrift industry led to abusive lending practices among developers and mortgage lenders. To save the economy, government agencies ponied up more than $100 billion to bail out the industry.
One can only hope that the government has learned from the S&L crisis and is in position to prevent anything similar from happening in the mortgage market.
More oversight is necessary, but even that may not be enough to stave off a spiral of bankruptcies already caused be delinquent home loans.
In the end, the only person you can count on is you.
Don’t be fooled by deals that sound too good to be true. There are people willing to give you home mortgage loans no matter how bad your credit is - a far cry from the good old days when mortgage lenders looked out for your best interests.
SOURCE: Annapolis Online