Subprime Mortgages Show A Climbing Delinquency Rate

Subprime Mortgages Show A Climbing Delinquency Rate

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“Subprime” mortgages are loans made to people with less than pristine credit. It’s a code word for those of us who have some sort of credit issue in our past and don’t make the cut as a “prime” borrower. For several years now, subprime borrowers have been getting subprime loans, which mean loans with substantially higher interest rates than prime borrowers. In other words, the shakier your credit the more expensive your loan will be – and to some degree, the more difficult to make payments on every month.

Add to that the fact that lenders have been offering loans with ninety, ninety five and one hundred percent financing on loans. Mix that in with adjustable rates that cause steep hikes in monthly premiums after a few years, and you have millions of working Americans with substantial risk exposure on mortgages that they have taken out in the last few years. The reckless lending and starry-eyed borrowing is starting to generate some negative statistics.

According to UBS, the eighth-largest underwriter of mortgage-backed securities (a financial instrument backed by home loans) residential mortgage loans to subprime borrowers are “going bad” fifty percent faster this year than for the same period in 2005. What does “going bad” mean? In the UBS report, it means loans that are at least six months old and are delinquent more than sixty days.

In the words of the UBS report, "Subprime performance continues to deteriorate for newer originations." The change was from 1.6% of loans in 2005 to 2.4% of loans in 2006. That is a miniscule portion of all mortgages, but it is the degree of acceleration that concerns analysts.

The reason for this concern in the securities market is that subprime loans have been behind the fastest growing portion of the mortgage bond market. Subprime mortgage bonds, sold on Wall Street as "home-equity asset-backed securities," have nearly doubled since 2002. Currently there are $565 billion of them in play. If you consider the fact that subprime mortgages are more common than prime mortgages and that over a third of all recent mortgages have been interest only or option mortgages, and you begin to understand the concern on Wall Street.

According to the report second-lien loans and mortgages with a high loan-to-value level created this year are also showing deteriorating lending standards. That means home refinance loans and loans of ninety to one hundred percent financing are in a shaky category of their own. The housing and loan frenzy produced an abundance of lenders which has, over the last year, become an overabundance of lenders. As the housing market has cooled mortgage originators have been under increasing pressure to produce, while their margins are being squeezed by the cost of funds. It all makes for an extremely nervous lending industry.

By: G. Mundy

G. Mundy is a freelance writer for the nations largest second mortgage, refinance loan service website. For more information, please visit Mortgage Lenders



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