This is the first article from Matthew who is a new contributor. I’m publishing it for him, but expect to see more from him shortly.
Bernice Ross, a national Realtor speaker and CEO of Realestatecoach.com recently stated on Inman News (inmannews.com), “Only 25 percent of all mortgages are subprime, and of these, 75 percent are performing.”
Wow! Using Ms. Ross’ own math, what she really telling us is that 25% of subprime loans are NOT performing and a minimum 6.25% of all mortgages (25% non-performing of 25% subprime loans she discloses in her comments) are NOT performing.
We can safely assume that since the vast majority of subprime mortgages were originated in 2005/2006, most of these have yet to adjust or step-up in interest rate. Not to mention the subprime underwriting quality went to down the toilet with the first half of 2006 subprime mortgage originations.
New Century, Option One, BNC, NovaStar, Household Finance, Fremont Investment & Loan, Full Spectrum Mortgage, Ameriquest, WMC, Long Beach Mortgage, First Franklin, ResCap, OwnIt, ECC, ResMae, Fieldstone, etc. are but distant memories or fading glories of the subprime debacle.
Yet the residue of their subprime mortgage originations is littering the real estate market in every neighborhood around the country. Whether outright fraud or just stupid underwriting, there are over one million bad loans that have to be dealt with by a declining real estate market. All these future REOs will put added downward pressure on real estate prices.
I’m already experiencing the first wave of the 2005 subprime mortgages trying to refinance into Fannie/Freddie type fixed rate products. One problem for many of these borrowers is that they had poor credit back then and many still have the same poor credit two years later, including 30-day late pays in 2007.
Another problem is that most of these borrowers purchased a home by putting 0% down payment and using 100% (or higher to cover closing costs) financing at the peak of the real estate market. Most properties have not appreciated in value since 2005. In many areas property values have declined. So that makes many of these subprime borrowers LTVs now over 100%. Lenders today have no desire to lend over 100% on a rate/term refinance.
But the biggest problem facing subprime borrowers is that lenders today require you to qualify for the financing. Long gone are the NINJA (No Income, No Job or Assets – No Problem!) loan days. To get a Fannie/Freddie fixed rate loan you have to have a 620+ FICO score, a documented job, documented assets, full appraisal and standard GSE underwriting.
I’m sorry Ms. Ross, Realtor cheerleading, “feel good” propaganda and myopic optimism won’t cut it this time. I’ve been down this road before in 1990-1995. Only back then we weren’t originating mortgage loans with 1.50% interest-only Option ARM loans, NINJA 103% CLTV low FICO score subprime loans, 100% LTV no doc investor loans, and high-LTV Alt-A (no doc) loans.
Back then aggressive subprime lending was at 75% LTV with a 25% cash down payment. Investors had to put a minimum 25% cash down payment. Most mortgage loans were written at full doc. The potential neg-am ARMs were qualified at 7.50%. And still we were in a real estate recession for five long years.
Mark my words, the real estate and mortgage markets will go through massive changes in the coming two to three years. Unfortunately, things are going to get a lot worse before they get better.
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