Mortgage Market And Subprime Borrowers

Mortgage Market and Subprime Borrowers

by

michael russell

Weak credit histories as well as reduced repayment capacities are the major characteristics of subprime borrowers. Such borrowers always carry higher risks of becoming defaulter in comparison to others. Moreover, when a person becomes delinquent in repayment of loans, the mortgage lender has the right to confiscate the mortgaged property of the borrower through the process of foreclosure.

By March 2007, the estimated value of subprime mortgage in United States counted to around 1.3 trillion U.S dollars. By that time a staggering 7.5 million subprime mortgages were also outstanding. It was fund that around 16% of such delinquent borrowers were delinquent for 90 days and foreclosure proceedings were initiated against them. Lenders had taken steps for foreclosure of nearly 1.3 million properties. By 2009, the quantum of properties under foreclosure was 2.8 million.

Ten of the fifty states in United States accounted for around 74% of the foreclosure findings by 2008. Only two of the states namely, California and Florida accounted for around 41% of the foreclosures that occurred in United States . Reasons for such crisis were multiple and were pervasive in both housing as well as in credit markets.

Some of the primary reasons were

Inability of the homeowners in making mortgage payments;

Adjustable rate mortgage resetting;

Borrowers over extending the repayment period;

Predatory lending;

Speculation as well as overbuilding during the boom periods;

Risky mortgage products;

Very high personal as well as corporate debt levels;

Financial assistance that initially concealed the risk of the mortgage default;

Defective monetary and loan policies;

Influx of money from the private sectors; and

Adjustable rate mortgage speaking adversely on the financial status of the borrower.

Very often the mortgage lender sold such mortgages either directly or indirectly through the brokers. A danger inherent in the process was the moral hazard that lay at the core of disasters faced by the borrowers financially. Inappropriate government rules and regulations contributed no less to such plights of the borrowers all over the country.

Especially the influx of finance from the private sector was the major catalyst of the crisis. Crisis was further compounded by the predatory mortgage policies adopted by lenders like the adjustable rate mortgages and 2-28 loans.

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