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Mortgage market of the USA


The mortgage market in the United States has been the subject of much debate concerning the adverse effects of the “Subprime” factor. Today’s discussion will seek to lift the veil from, and demystify, the issues as they relate to the ordinary man and woman in St. Vincent and the Grenadines. At some point in our lives we as proud Vincentians aspire to owning our own homes, and accordingly will approach a lending institution to assist us in financing the purchase or construction of a property.{{more}} The first thing the lending institution will do is to asses our ability to service the loan, based on our current income and expenditure. As part of their analysis, the institution may then assign credit scores to prospective clients/borrowers ranging for example from about 300 to 850. In the United States where the “subprime” debate ranges, a credit score of at least 620 would usually qualify borrowers for prime loans at the going rates of interest, and such persons could be assigned to the category of prime borrowers. Other clients who could not have bought a home without taking a mortgage bearing punitively high rates would fall into the category of less than prime borrowers (less than 620), hence the term Subprime.

One common assumption about the subprime mortgage is that it revolves around borrowers with questionable credit, but as it turns out, plenty of people with seemingly good credit ratings are caught in the subprime trap. This in some instances is because the borrower does not want to document his/her income or assets. But the growth of an industry of lenders specializing in subprime loans has led to an increase in the number of reasons why borrowers with good credit scores sign up for subprime loans. This category of Borrowers may have predetermined that they would be in a position to refinance the loan in a few years before the interest rate on their loan moved higher. However, falling home prices in the past year have suddenly made that prospect unrealistic.

There are some lenders who do not regard 620 as the breakeven point between prime and subprime. They regard a score of 720 as qualifying most borrowers for conventional loans unless they are seeking to spend more than they can afford, or don’t want to have to document their income or assets. Lenders make their decision according to a variety of factors, including their own policies and risks. Credit scores themselves are based on a variety of factors- a consumer’s payment history and debt load, how long the consumer has had credit, how actively the consumer is looking for new credit and the type of credit the consumer uses. Lenders are quick to remind us as borrowers that they are not responsible for any reckless tendencies in our real estate investment or finances, neither are they responsible for the reasons we have in mind when considering loans with subprime costs. The ball is played right back into our court. They argue that there are many borrower situations and multiple risk factors in addition to credit grading that go into loan underwriting decisions, and often do result in borrowers with good credit grades accepting subprime loans. Nevertheless, credit worthy borrowers with subprime loans may turn out to serve as a shock-absorber for the current mortgage crisis in the U.S. They are more likely than traditional subprime borrowers to withstand the twin shock of declining home prices and adjustable rate mortgages when they are reset at higher interest rates.

Delinquency rates for subprime loans have climbed, in part due to inadequacies in documentation of borrower’s income or assets. Many were made to first-time home buyers and to speculators who planned to quickly sell the property. During a housing boom, the lower introductory rates on adjustable mortgages make them feel closer in cost to regular loans to many subrime borrowers, but those rates can rise after two or three years. A problem with mortgage loans is that even experienced borrowers with high credit scores are too casual about the loan process. Some borrowers pay higher rates than they should pay because they don’t shop around enough.

The purchase or construction of a home is likely to be the largest single investment we would make in our lifetime. Let us approach it in a serious manner. The current mortgage crisis in the US should be instructive for us all, particularly the first- time home buyers who now have the opportunity to avoid many of the glaring pitfalls that may be strewn along our paths.