THE SUB-PRIME AND PRIME LOAN MARKET
Today’s various media outlets play up bad economic news more than ever, which leads to misconceptions about economic reality. In dealing with the news about sub-prime loans, they have greatly over-exaggerated the true situation. David Wyss, chief economist at Standard & Poor’s in New York said on January 4, 2008: “You look at the magnitude of the sub-prime problem, and it’s just not that big relative to the size of the economy or the financial market.”
It may surprise you to know that including Alt-A loans (less than prime but better than sub-prime) with sub-prime loans only makes up 13.1% of mortgage market.
Market Share of Loans: Sub-Prime Prime Loans FHA/VA
Fixed ARMs Fixed ARMs
U.S. 6.3% 6.8% 63.1% 14.5% 9.3%
California 15% 83% 2.0%
Delinquencies – 3rd Quarter Findings:
A delinquency in a mortgage payment occurs when just one monthly payment has been missed. In California, 21% of the loans that are delinquent are non-owner occupied home loans. The U.S. average is 13%.
Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined
U.S. 16.31% 3.12% 12.92% 6.58% 5.59%
California 12.6% 14.20% 1.00% 3.25%(2Q)
Notice that the combine d rate of delinquencies for all loans in the U.S. is 5.59%. The media never asks, “What was the all-time low delinquency rate?” The answer is 4.0%, which occurred in the 4th quarter of 2005! Also notice that 84% of sub-prime buyers have never missed a payment!
Notices of Default – 3rd Quarter Findings:
Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. This begins the foreclosure process. Most of the rise in this process is due to Florida, Ohio, Michigan, and California loans.
Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined
U.S. 1.38% 4.72% 0.22% 1.02% 2.22% 1.03% 1.69%
California Figures for California could not be found
Although the four states of California, Florida, Nevada, and Arizona currently have the largest amount of loans in foreclosure, in the 1st quarter, 24 states saw a decline in foreclosure starts. By the 2nd quarter, 36 states saw a decline. California and Florida hold 28.1% of all sub-prime ARMs, yet 33.7% are in the foreclosure process.
The media will report that 72,571 notices of default were filed in the 3rd quarter – a new record for California, surpassing the 1st quarter of 1996 with 61,541 filings. Nowhere do they say that since that time, California has built 2 million more homes and condos. By the way, those filings were on 68,746 properties.
Foreclosures – 3rd Quarter Findings:
Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property.
Sub-prime Prime: Combined vs. 2006
U.S. 3.12% 0.79% 1.45% 1.09%
California n/a n/a 2.08% 1.17% (2Q)
Sub-prime adjustable loans represent only 6.8% of the market, yet they create 43% of all foreclosures. Over the past 20 years, the average foreclosure rate in the U.S. has been 1.09%. The lowest foreclosure rate ever was 0.86%. In California, 54.6% of homeowners emerge from the foreclosure process by bringing their payments current, refinancing, restructuring their loan or successfully selling their home and paying off what they owe.
Last year, 43 states had fewer foreclosures in 2007 than in 2006. Only 7 states have a foreclosure problem. One third of all foreclosures come from just two states – California and Florida. The other two thirds come from Nevada, Arizona, Indiana, Michigan, and Ohio.
Reasons for Foreclosure:
The #1 reason: Fraud and/or Speculation! As of 12/1/07, the FBI reported 46,717 cases of mortgage fraud. As of 8/30/07, California investors (those not living in the home) represented 21% of the loans in default. In Nevada, the number is 33%, Arizona is showing 26%, and Florida has 25%.
The #2 reason: Unethical Lending! The government has enacted new standards for lenders including more education and licensing. New Truth in Lending guidelines are being put in place and so far 21 states have enacted new rules and regulations, including California.
The #3 reason: Loss of a Job, Medical Problems or a Change in Marital Status
Financial Support for Housing:
Since housing is so important to the overall economy, it will always receive help when things go wrong. Today, lenders are modifying existing loans to prevent foreclosure. Other lenders are not adjusting the interest rates upwards when the rollover period comes due. Congress has passed legislation allowing Freddie Mac and Fannie Mae to buy more sub-prime loans. FHA may raise their loan limits and cut in half, the down payment. The Federal Reserve has reduced the discount rate, and is pumping money into the credit markets. The European banks put $400 billion dollars into the credit markets in December. Investment firms, private equity companies, giant bond companies, and hedge funds are all planning on buying up delinquent mortgages. The big money houses have pretty much written off their bad loans’, getting ready to institute new underwriting standards, and will once again enter the home lending business.
(Source: Mortgage Bankers Association, Federal Reserve, FBI, Inside Mortgage Finance, U.S. Congress, and DataQuick Information Systems)
Today’s various media outlets play up bad economic news more than ever, which leads to misconceptions about economic reality. In dealing with the news about sub-prime loans, they have greatly over-exaggerated the true situation. David Wyss, chief economist at Standard & Poor’s in New York said on January 4, 2008: “You look at the magnitude of the sub-prime problem, and it’s just not that big relative to the size of the economy or the financial market.”
It may surprise you to know that including Alt-A loans (less than prime but better than sub-prime) with sub-prime loans only makes up 13.1% of mortgage market.
Market Share of Loans: Sub-Prime Prime Loans FHA/VA
Fixed ARMs Fixed ARMs
U.S. 6.3% 6.8% 63.1% 14.5% 9.3%
California 15% 83% 2.0%
Delinquencies – 3rd Quarter Findings:
A delinquency in a mortgage payment occurs when just one monthly payment has been missed. In California, 21% of the loans that are delinquent are non-owner occupied home loans. The U.S. average is 13%.
Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined
U.S. 16.31% 3.12% 12.92% 6.58% 5.59%
California 12.6% 14.20% 1.00% 3.25%(2Q)
Notice that the combine d rate of delinquencies for all loans in the U.S. is 5.59%. The media never asks, “What was the all-time low delinquency rate?” The answer is 4.0%, which occurred in the 4th quarter of 2005! Also notice that 84% of sub-prime buyers have never missed a payment!
Notices of Default – 3rd Quarter Findings:
Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. This begins the foreclosure process. Most of the rise in this process is due to Florida, Ohio, Michigan, and California loans.
Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined
U.S. 1.38% 4.72% 0.22% 1.02% 2.22% 1.03% 1.69%
California Figures for California could not be found
Although the four states of California, Florida, Nevada, and Arizona currently have the largest amount of loans in foreclosure, in the 1st quarter, 24 states saw a decline in foreclosure starts. By the 2nd quarter, 36 states saw a decline. California and Florida hold 28.1% of all sub-prime ARMs, yet 33.7% are in the foreclosure process.
The media will report that 72,571 notices of default were filed in the 3rd quarter – a new record for California, surpassing the 1st quarter of 1996 with 61,541 filings. Nowhere do they say that since that time, California has built 2 million more homes and condos. By the way, those filings were on 68,746 properties.
Foreclosures – 3rd Quarter Findings:
Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property.
Sub-prime Prime: Combined vs. 2006
U.S. 3.12% 0.79% 1.45% 1.09%
California n/a n/a 2.08% 1.17% (2Q)
Sub-prime adjustable loans represent only 6.8% of the market, yet they create 43% of all foreclosures. Over the past 20 years, the average foreclosure rate in the U.S. has been 1.09%. The lowest foreclosure rate ever was 0.86%. In California, 54.6% of homeowners emerge from the foreclosure process by bringing their payments current, refinancing, restructuring their loan or successfully selling their home and paying off what they owe.
Last year, 43 states had fewer foreclosures in 2007 than in 2006. Only 7 states have a foreclosure problem. One third of all foreclosures come from just two states – California and Florida. The other two thirds come from Nevada, Arizona, Indiana, Michigan, and Ohio.
Reasons for Foreclosure:
The #1 reason: Fraud and/or Speculation! As of 12/1/07, the FBI reported 46,717 cases of mortgage fraud. As of 8/30/07, California investors (those not living in the home) represented 21% of the loans in default. In Nevada, the number is 33%, Arizona is showing 26%, and Florida has 25%.
The #2 reason: Unethical Lending! The government has enacted new standards for lenders including more education and licensing. New Truth in Lending guidelines are being put in place and so far 21 states have enacted new rules and regulations, including California.
The #3 reason: Loss of a Job, Medical Problems or a Change in Marital Status
Financial Support for Housing:
Since housing is so important to the overall economy, it will always receive help when things go wrong. Today, lenders are modifying existing loans to prevent foreclosure. Other lenders are not adjusting the interest rates upwards when the rollover period comes due. Congress has passed legislation allowing Freddie Mac and Fannie Mae to buy more sub-prime loans. FHA may raise their loan limits and cut in half, the down payment. The Federal Reserve has reduced the discount rate, and is pumping money into the credit markets. The European banks put $400 billion dollars into the credit markets in December. Investment firms, private equity companies, giant bond companies, and hedge funds are all planning on buying up delinquent mortgages. The big money houses have pretty much written off their bad loans’, getting ready to institute new underwriting standards, and will once again enter the home lending business.
(Source: Mortgage Bankers Association, Federal Reserve, FBI, Inside Mortgage Finance, U.S. Congress, and DataQuick Information Systems)
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