Are Subprime Mortgages Making a Return?

by on Mortgage

Subprime Home

One of the main causes of the real estate market crash revolved around subprime lending, which is when lenders provide home loans to those who tend to have issues paying their mortgage payments on time – primarily because their poor credit and financial history should’ve precluded them from a loan in general.

Before the crash, lenders were providing home loans to those who honestly should not have been approved for the amounts in which they were becoming “qualified borrowers.” As a result, many of these homeowners fell behind on their mortgage payments (for a variety of reasons), eventually leading to the real estate market collapse.

Seeing how this happened and how the real estate market is just now making significant strides toward recovery, surely lenders are staying clear of subprime mortgages. Unfortunately, that apparently is not the case – it appears as though subprime mortgages may be back.

Obama’s New FHFA Nominee

President Obama has recently nominated Mel Watt for the Director of the Federal Housing Finance Agency (FHFA). This nomination is a bit controversial, especially since Mel Watt was among those encouraging homeownership for individuals with bad credit.

In fact, Fannie Mae and Freddie Mac have been some of the frontrunners in subprime lending before (and apparently now after) the housing market crash.

Low Credit Score? No Problem!

Right after the real estate market crash, potential homebuyers (even those with excellent credit) were having a hard time securing a home loan because of the incredibly strict lending standards. Clearly, during this time lenders went to the other extreme.

Now, however, with the foreclosure settlement agreements being behind them, many lenders have lax lending standards and are allowing those with lower credit scores to become approved for home loans. Many people fear that subprime mortgages are back and that we could be well on our way to another real estate market crash.

What are these individuals who are opting for subprime mortgages signing up for? Honestly, disaster. Those without great credit who are obtaining qualification are paying high fees, significant down payments, and are being slapped with very high interest rates.

Plus, the more subprime mortgages that are secured – with the proved track record of failure delinquency rates and foreclosure rates for those with these subprime mortgages – the more “at risk” our still-vulnerable real estate market is going to be.

At the end of the day it all comes back to the same thing – a lack of oversight for these lenders. The government has to step in and start holding these lenders accountable in order to keep the real estate market from heading down the same path that led to the real estate market bubble and crash.