Several major sub prime lenders have recently discontinued business and/or curtailed loan origination. This is creating risks in the mortgage market . We have outlined several reasons why more of these lenders are now at risk.
1. Increases in non performing sub-prime loans can force increases in lenders rates on new origination's. The reason for this is that sub prime loans are perceived as being riskier because of the increased rates of default in the loans being serviced. The increase in rates hurts originators in several ways. First fewer clients qualify for loans due to the increases in monthly mortgage payments. Second loans that the lender has not yet sold are reduced in value because the secondary markets want higher returns to offset perceived increase risk. Both of these factors hurt the profitability of the sub prime lender.
2. Sub-prime lenders are especially vulnerable to increases in interest rates by the Fed. Rate increases by the Fed put pressure on conforming lenders to raise rates. Rate increases of this nature apply also to the sub prime market. Under this scenario Sub prime lenders also have pressure from increases in Non-performing loans this can cause increases in the premium that secondary investors require over the conforming rates. This has the potential to force rates higher than the .25 basis point increases that the Fed usually increases rates. This can have a devastating effect on lenders who have a high Inventory of unsold loans and who my be seeing deterioration in the performance of their prior origination's. This type of scenario can force lenders out of business if warehouse lenders refuse to fund new origination's.
3. Sub prime lenders have originated many Adjustable rate loans in the past several years that were priced at below market interest rates. These loans will have payment increases. If borrowers can not afford the increased payments increases in delinquency rates will occur. This of course will result in higher costs for servicers and less profitability for lenders.
4. Sub prime lenders have also lent money at very high loan to value ratios. In a stagnant and declining real-estate market these loans will have higher default and foreclosure percentages. This again hurts lender profitability.
All of the items are serious threats to the financial health of the mortgage industry. They also have an impact on Real Estate values. In future posts we will discuss how this impacts Real estate prices and how consumers are both positively and negatively impacted by these events
This article was written by Ed Culin with Fairway Financial. If you need assistance in obtaining mortgage financing please visit our web site www.gofairway.com
This article was written by Ed Culin with Fairway Financial. If you need assistance in obtaining mortgage financing please visit our web site http://www.gofairway.com