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The sub-prime mortgage market is exploding all over the country. Each county, state and the Federal Government is reeling over the grim statistics. These numbers show that millions of Americans are facing foreclosure. This foreclosure debacle is no more the fault of the sub-prime borrower than Hurricane Katrina is the fault of the residents of New Orleans.
External forces created this foreclosure meltdown. Deregulation of the banks, lending institutions & Savings & Loans was the first step toward opening up home ownership to anyone with a pulse. The Depository Institutions Deregulatory and Monetary Control Act of 1980 abolished usury laws on first-lien mortgages.
Usury laws, can prevent mortgages above a certain rate from even being made. Since lending institutions could not charge higher rates to sub-prime borrowers, this act eliminated that problem.
This law allowed lending institutions to actively market their products to those citizens who were least able to pay. This law allowed the lending institutions to charge higher rates. This law allowed lending institutions, savings and loans to fatten the pockets at the expense of the sub-prime borrowers. All the “slick rick” loan officers, bank officials and finance companies made money.
This act also was the starting point of the Savings & Loan Scandal – This act, though intended to help individuals, helped to create two of the largest financial scandals in the history of the United States. The first was the Savings & Loan Scandals of 1990 and now in 2007, A Record Number of Sub-prime Foreclosures. This tidal wave of foreclosures was put into action long before the first sub-prime borrower signed on the dotted line.
Yes, the fact is that many Americans who could not afford to purchase a home were given the opportunity to own a piece of the American Dream. Sub-prime borrowers were eager to purchase their first home. Now that that dream is now a national nightmare, no one wants to take the blame.
There was no education provided to the first-time home owners. These owners did not anticipate the “Murphy Law” rule that goes along with purchasing a house. Neither the Realtor nor the lending institutions gave the new home buyer all the facts.
These professional provided their services to the sub-prime borrower and made a fortune. These professional did not determine the long-term ramifications of these hasty actions. These professionals were just pushing papers. The fact that the homeowner is in foreclosure today did not affect their commissions.
Now 2-5 years later, that irresistible home loan has become a monkey around the neck of the homeowner. Where is that real estate agent who calculated the interest only payments for the home buyer? The commission of the loan officer is already spent. Can the loan officer explain to the homeowner that the teaser $1,800 per month payment will become a $3,000 per month payment within two years. By the way, your salary will probably not go up enough to cover the additional amount.
The whole American Dream carrot was fueled and funded by the banks, lending institutions and rogue loan officer with help and the assistance of the Federal Government. The benefactors of the government’s largess are now facing foreclosures in record numbers.
Home ownership is thought to be the right of all American citizens. Owning a home gives everyone an opportunity to build wealth and establish a stable home for his or her family. The expanded sub-prime home ownership boom over the last years is now the subject of blame game economist who overlooked some critical factors involved in millions of American purchasing homes that they could not afford.
Subprime borrowers do not have the income required to pay the mortgages on the homes they purchased. These home buyers had no savings or a down payment to fund their dream. To make the buying process run smoother, these buyers received 100% loans with no down payment required.
The subprime borrowers will pay higher interest rates, points, and fees. The reliance on adjustable rate mortgages (Arms) without proper verification of the repayment ability of the borrower create a huge gap in outgo versus income
Many people signing up for interest only or Adjustable Rate Mortgages (Arms) realize too late that they made a mistake. The offer was a great deal when the monthly payment was only $1,800 a-month. The deal went sour when the ARM adjustment took the payment to $3,000 a month.
Most financial analysts warn against homeowners paying more than 40% of their net income toward a mortgage payment. In many cases with subprime borrowers the net amount of their mortgage payment exceed 60 to 70 percent of their take home pay. These are mortgages that the sub-prime borrower can no longer afford.
These mortgage payments are obviously unmanageable. The number of foreclosures on record attests to that fact. No one could predict the future. As interest rates went up, some homeowner lost their jobs or became disabled.
But even before the ARM adjusted, the amortized points and fees of a mortgage or the effective mortgage rate is not as low as the lender presents to the homeowners. The effective mortgage rate is actually in the double digits.
In addition, sub-prime mortgage with prepayment penalties are more attractive to outside investors. After the unsuspecting borrower signs the papers, their loan is bundled with thousands of others and sold to investors in the secondary mortgage market as mortgage-backed securities.
There are several state and federal regulatory agencies that have the responsibility for different segments of the mortgage market. Because there are so many different agencies, there are obvious gaps in the oversight for sub-prime loan practices.
Federal Reserve Chairman Ben Bernanke, says he will tighten the rules for mortgage and refinancing ads. The Office of Thrift Supervision is considering issuing new rules against deceptive mortgage ads. These agencies might solve some problems for sub-prime borrowers, but others will be swept away in the hurricane of foreclosure.