Vol 8 No. 17 - January 16, 2008

Subprime is the word of the year

By Louise Bolger
sun staff writer

To say that the real estate market in 2007 was a little off would be like saying the Titanic ran into a snowball. However, the less than desirable year did produce the word of the year, subprime as in subprime lending.

Subprime is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history, resulting in both risky and controversial lending practices. They are generally defined as individuals with limited income or having FICO credit scores below 620 on a scale that ranges from 300 to 850.

Millions of property owners are currently facing possible foreclosure because they were granted subprime mortgages with an initial fixed rate that converted to variable rates, or varying types of interest only mortgages. When the housing bubble finally deflated, property owners found themselves with higher monthly payments and no equity in their homes. This has flooded the market with properties being sold by individuals just ahead of a foreclosure or lending institutions after a foreclosure. Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market and, therefore, enabled millions more the ability to own a home.

The federal government has stepped in in an effort to help homeowners about to go into forclosure and help stabilize the real estate market. The HOPE NOW alliance was established as a coalition of mortgage industry companies which are seeking to reach at-risk borrowers to help them avoid foreclosures. Last month, the administration unveiled an agreement with the mortgage industry to freeze rates on certain subprime mortgages for five years in an effort to help homeowners in danger of losing their homes when their lower introductory rates reset to sharply higher levels in the coming two years. There are 1.8 million subprime mortgages that are scheduled to reset to higher rates this year and in 2009.

As a further step to stem the foreclosure tide, Treasury Secretary Henry Paulson said last week that the administration was exploring a significant expansion of the HOPE NOW program to help not only subprime borrowers but also borrowers of loans at prime rates.

Not everyone feels the federal government should intervene in the private sector helping individuals, investors and lending institutions. However, in the world wide economy we are operating in, this kind of a credit crisis has far reaching consequences across the world. Subprime debts were repackaged by banks and trading houses in investment vehicles traded around the world.

And the jury is still out on how long the crunch will go on. Former Federal Reserve Board Chairman Alan Greenspan is concerned that home values could be driven down even more, resulting in homeowners feeling less wealthy and spending less. Other economists, such as Edward Leamer of UCLA, doubts home prices will fall dramatically since most owners won’t have to sell, but predicts that home values will remain flat for several more years.

Who knew that someone is actually responsible for choosing the word of the year?

If I wasn’t a prisoner in my car for 20 hours driving south after the holidays I never would have heard this little known fact on the radio. At least I can be thankful that the word honored for 2007 was related to the real estate industry – I think.

To clarify a point I made in a column a few weeks ago, the state of Florida does not require a written and signed disclosure statement. It is a recommended practice and generally requested by real estate professionals, but it is not state law.


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