While the current news cycle is full of commentary on the current subprime mortgage fallout, over the long term the subprime market and “no doc” loans that are offered to borrowers are critical to maintaining our high level of home ownership in the USA and maintaining opportunities for those with less than perfect credit to obtain financing.
As Ben Bernanke testified this morning on Capitol Hill, lenders offering loans to subprime borrowers and loans that use stated income versus documented income (“no doc” loans) have been tightening their underwriting standards and doing more thorough reviews of those applicants. These measures will dramatically improve the quality of these loans in the future.
In many cases the bad loans that were underwritten in the last couple years were done by unscrupulous loan officers that did not follow the guidelines that were already in place and in many cases committed outright fraud against the lenders. In other cases, the loans were on a 1 year adjustable rate, interest only (no reducting in principal owed), or negative amortization where the math simply didn’t add up. These borrowers were being set up to fail without either a dramatic increase in their income or the continued meteoric rise in housing prices.
Mortgage lenders need to make money to survive. While we’re going through turmoil right now, many lenders have already taken the steps necessary to limit these problems in the future, which suggests this will only be a problem for the next year or two. I know this seems like a long time but you must also realize that this problem developed over several years too, so it makes sense that something that took several years to fester may take a similar amount of time to heal.
