In the not-too-distant past one generally associated a mortgage loan with a conventional 30-year fixed rate mortgage that had a 20% down and unchanging payments. The picture changed when adjustable options were introduced making inroads into what was till then a traditional bastion. It changed further with the advent of newer loan products for which
mortgage brokers and lenders did not consider imperfect credit as an impediment. Payments were made more flexible depending on the program chosen, which could be sub prime mortgages, interest-only loans, or piggyback loans. It opened up the possibility of homeownership to many for whom prime mortgages were beyond reach. But these loans, in keeping with their inherent features, were approved without reference to either the financial ability of the borrower to afford the mortgage payments, or verification of income. In other words, it allowed people to buy more house than they could afford.
The boom in the housing sector was largely attributed to these loans, which came with higher mortgage rates. But somewhere along the way the bubble had to burst – as it has with sub prime mortgages. By every standard of reckoning, delinquencies in sub prime mortgages have been steadily increasing – to reach levels that are the highest in five years – sending many bad credit mortgage lenders out of business. This trend has raised several pertinent issues. Factors such as underwriting standards used, verification of borrower income and loan-to-value ratios have been brought under the scanner.
Most borrowers did not realize the financial implications of such mortgages until too late. They failed to read between the lines, ignoring the fine print, often, with disastrous consequences. Many of these mortgages came with expensive prepayment penalties. It was not unusual to find adjustable rates that have risen steeply after the initial period,
forcing a sale or foreclosure due to inability on the part of the borrower to make the required payments.
Many analysts believe that the time has come to usher in more transparency into the system by bringing in much needed reforms and eliminating undesirable elements. The need for more stringent controls has been brought home like never before. It has emphasized the need for realistic underwriting standards, controllable loan terms and adequate consumer disclosure practices. It has also brought into focus the need for clearly explaining the features and risks involved to borrowers, so that they are aware of what they are letting themselves in for.
Concerns have also been voiced about how these events can affect the broader mortgage market. Adjustable rate mortgages, for one, of which sub primes constitute a large part, will reset at higher rates in 2007. Further foreclosures may, in time, impact the economy adversely, though it is hoped that stricter regulations and market forces will make the required adjustments.
Many analysts believe that the time has come to usher in more transparency into the system by bringing in much needed reforms and eliminating undesirable elements. The need for more stringent controls has been brought home like never before. It has emphasized the need for realistic underwriting standards, controllable loan terms and adequate consumer disclosure practices. It has also brought into focus the need for clearly explaining the features and risks involved to borrowers, so that they are aware of what they are letting themselves in for.
Concerns have also been voiced about how these events can affect the broader mortgage market.
Adjustable rate mortgages, for one, of which sub primes constitute a large part, will reset at higher rates in 2007. Further foreclosures may, in time, impact the economy adversely, though it is hoped that stricter regulations and market forces will make the required adjustments.
