Hi guys,
Not sure if you are aware of the situation in the U.S at the moment with subprime lenders. Many have gone bankrupt . For those who may be unfarmiliar, subprime lenders are lenders who provide high credit ,high risk loans to people who are unable to obtain finance from the traditional banks.
Here is an article I found on "recordonline.com".
Subprime loan victims are those who can least afford it
ByApril 10, 2007
When New Century Financial recently filed for bankruptcy, it seemed like a case of just desserts.
The company that specialized in the subprime — or high interest, high risk — credit market had been an instrument of financial hardship for many families. Now that same hardship came back to haunt New Century.
Defenders of subprime lenders say the companies helped increase minority homeownership rates by allowing them to get a piece of the American dream. It's what President Bush calls the "ownership society."
But some of the products subprime lenders pushed have fallen just short of evil, such as offering 2-28 mortgages that hook folks in with low teaser rates, then jolt them two years later with rates that often exceed the market rate.
Why does anyone sign up for these things? Because many of us are optimists. We think our incomes are going up, and we'll be able to afford higher prices when they come. And sometimes we can.
But sometimes life bites, companies close and people get laid off, fall sick or get divorced. These factors often lower incomes, not increase them.
And people of color are more likely than others to have subprime loans because of lending discrimination. According to the Center for Responsible Lending, high-income black Americans, even those with high credit scores, are 1.6 times more likely to get a subprime loan than their white counterparts, even when they bring larger down payments to the table.
Many black Americans with higher incomes and subprime loans often shrug off their higher expenses as the cost of "banking while black."
But lower-income folks run the risk of losing their homes, especially when their circumstances do not match the optimism implicit in boutique products with variable interest rates.
And subprime and predatory lenders seem to target those who can least afford their products — those with few financial options and little financial literacy.
The effect is rising foreclosures. One in five subprime loans originated in the past two years will end up in foreclosure compared to just more than 1 percent of conventional loans, according to the Center for Responsible Lending.
The biggest gains go to mortgage bankers who write the subprime loans and collect fees of up to 5 percent of the value of the loan. Then there are the appraisers and others whose fees are paid whenever someone takes out a loan, no matter how shaky it is.
In the short run, companies like New Century Financial reaped the rewards. With the housing boom, its stock seemed to be a profitable proposition. Now more than two-dozen subprime lenders have gone out of business, and their failures may help reshape the mortgage industry.
Sadly, regardless of what reforms may come, the biggest losers right now are the people who were ripped off by these subprime lenders. Those with poor or less-than-stellar credit may now find it impossible to access reasonably priced credit.
While it's true that many subprime lenders took advantage of homebuyers, many others were able to help people get into, and remain in, the housing market.
Reform needs to involve subprime lenders verifying applicants' income and assets and refusing to lend to those who simply can't yet afford their payments. If they did so, they'd suffer fewer losses and we'd have fewer foreclosures. And if they'd work with some community programs, such as Homes Free USA, that require potential buyers to work with credit counselors and others for a year before buying a home, lenders could make the case that they care about both people and profits.
Instead, they send out mass mailings assuring desperate people that they can get extra money by refinancing their homes. And some use deceptive tactics that continue to cost hundreds of thousands of people to lose their homes to chicanery.
The bankruptcies of several subprime lenders like New Century make clear that reform needs to happen now.
Julianne Malveaux is an economist, author and the incoming president of Bennett College for Women (www.bennett.edu).
What you are going to see is many more opportunities to buy foreclosures. This is obviously good for investors but not the poor people who will lose there homes.
Many Americans will struggle to get finance. There is a massive population that will not be able to afford it. We believe there is also going to be a huge need to Owner finance properties to people and that rent to own options will be very attractive.
Just thought I would share this article with you all.
Providing Turnkey Real Estate Investments In The USA.
We also provide Owner Finance in a new emerging market.E-mail:[email protected]
web: http://www.gr8realestateinvestments.comON SKYPE AT: chaddylansimons
Thanks for this as perhaps Australia will follow wih so many buying above their real capacity to pay interest only loans etc.
I am a bit torn having had to move out my own home in an area of rising real estate prices when I see other families have to start again and wish more people could build lower cost homes that are stll as beautiful and functional.
Yet the investment opportunities are there as well.
Thanks for the article.
It's very hard to build a low cost home in Aus when the Govt is padding out the cost of buying and building by nearly $100k in Govt costs and taxes. Maybe the Govt will change it's ways and not add charges and taxes to the housing industry? Good luck.
I have no doubt that the Aus market will suffer a similar fate as what is happening over here in the USA. Foreclosures over here are at all-time highs in several States as all the fringe loans are reaching the change-over dates.
The "fringe" loans that lenders and M.B's are putting people into in Aus will come back to bite many on the bum in the next 3-5 years (maybe even sooner). It's a pity that Aus follows the USA in so many things as so much of what they are dong over here is not working for the majority of people (another story).
I believe that a good part of the current "revival" of the Melb market is due to the influence of buyers who are in the market thanks (or no thanks) to theses types of loan products. In previous times they would not have qualified for finance, so the market would have stalled as we all thought it would after the boom ended in '03. This doesn't seem to be happening, even though it is well known that affordability is not good in many parts of the country.
Even though there is a new spurt of growth happening in Melb right now as others have attested to in the "Melbourne Boom?" thread, watch out when the affordability hits a new low in a couple of years – many of those adjustable rate mortgages that are being signed now will hit the change-over rate and there will be many houses around that are worth less than the loan, and the owners won't be able to afford the new interest rate.
When people are supposedly paying $60-$80k above the listed price of a house in an era when affordability is supposedly so low, I get nervous; especially when those houses are in the average or above average price range. I can understand the lower end still ticking along, as these houses are still within reach for many home buyers and investors, thus there should be more activity there. Another reason why the middle range houses are still being sold for good prices in my opinion is because of overseas investors whose own backyard has become un-affordable and see our shores as cheap by comparison.
But this renewed mini-boom seems to be fulled by the higher earning middle class who want to trade-up or start off with a better property to keep up with the Joneses; wanting to move into suburbs that have just boomed and should still be in a period of little growth.
Hi Mark,
Some interesting observations, but I really do think your a little pessimistic about the Australian market, particularly with the Melbourne "boom". A lot of the growth in Melbourne has been in the high end suburbs, which I would think would have come from increased prosperity resulting from strong economic growth more than anything. Of course, I can only speak from my own experience, but generally when we write loans in the higher priced suburbs in most cases the clients have at least a 20% deposit as the mortgage insurance premiums are a deterrent to borrowing more than this amount when you get over a certain level of borrowing. At the lower end the market has actually been quite stagnant in many areas as the lower affordability has had an effect on lower income earners. So I think you are not taking into account that many of the middle class are actually wealthier and on higher incomes and therefore can afford the higher prices.
I agree with your view on adjustable rate mortgages and I think they are a disaster waiting to happen for many people, but they make up such a small percentage of the mortgage market here (as opposed to the US where they are quite prevalent) there is no indication they will have any major effect on the market.Regards,
Cameron Perry
Director
Perry Financial Strategies
Level 13, 30 Collins St
Melbourne VIC 3000
Ph (03) 9662 1999
Fax (03) 9662 2044
You must be logged in to reply to this topic. If you don't have an account, you can register here.
