In the year 1994, subprime mortgages amounted to 5% of the total mortgages. By 2005, this figure had shot up to 20%. In 2006, 22% of all subprime loan payments in arrears of 60 days or more occurred in Jackson, Mississippi; while Detroit, Boston and California figured at 24.6%, 15% and 14% respectively.
Previously, it was the commercial banks that offered mortgages at fixed rates only. With changes brought about in the banking system, mortgage finance companies and mortgage brokers were now competing with the traditional banks.

The consumer was offered loan repayment options at low interest rates for a longer period of time with the actual prices of property having shot up. Thus the consumer now had more choices to get his mortgage serviced. Subprime loans took care of defaults on payments resulting in an even longer repayment span.

It was in 2005 that interest rates started to inch up again after a long spell of stability. Consequently, there was a gradual slowdown in demand for new homes. It was then that the prices of houses also started coming down. Mortgage defaulters were increasing. Home owners with subprime mortgages were neither able to deal with increase in payments nor were they able to sell their homes at their previous value. As home values and prices had dwindled rapidly, homeowners had difficulty selling at a price that would cover their mortgages. In California, the houses were overvalued by as much as 77%.

The total mortgage debt outstanding was $12,063,864 million in 2005. This went up to $14,607,840 million in the fourth quarter of 2008. With federal government aid, this figure had edged down to $14,287,340 in the fourth quarter of 2009.

This has resulted in homelessness of Americans on a massive scale. Approximately 170,000 families needed shelter in 2009, up from 159,000 in 2008, according to an annual survey by the Department of Housing and Urban Development. Forty-two percent of the homeless were on the streets in 2008. In 2009, twenty-nine percent of adults were staying with relatives. $1.5 billion of stimulus money has been allotted for the homelessness prevention program. Short and medium-term rental assistance (ranging from 3 to 18 months) will be provided to individuals and families. These funds will also be allocated for utility deposits, utility payments, moving-cost assistance and hotel vouchers.

An estimated 2.5 million foreclosures were completed between 2007 and 2009. Another 5.7 million foreclosures seem unavoidable, given that mortgages have become too expensive. The Home Affordable Modification Program modifies the loans but beyond that, those who do not get support by the Federal Government are expected to default again within 12 months. These customers are increasingly burdened by credit card debt, auto loans and other expenses. Re-default rates are expected to go up from 40% to 60 % on modified mortgages. People are being advised to opt for short sale over foreclosures and thereby avail of the cash incentive. As many as 7 million houses are vacant and not currently for sale. The inventory must be cleared before the industry rebounds. Further complicating matters, the costs of new homes may increase due to restrictions imposed by the Environment Protection Agency, tightening requirements for builders to better handle storm-water runoff. The National Association of Home Builders is soon expected to enact these regulations.

First-time buyers accounted for nearly half of the homes purchased in April, 2010. This is attributed to historically low mortgage rates and lenient lending standards. The head of the Federal Housing Administration, David Stevens, calls this “a market purely on life support” and in addition, lending is expected to tighten. Also, the European debt crisis could compel a hike in prime lending rates of banks. So even if the mortgage rates currently remain low, a number of factors may shape the future of the American housing market. Unemployment trends will also contribute towards how the real estate industry rebounds in the immediate future.

The uncertainty is not going to end in a hurry.

Tags: Mortgage Crisis, Mortgage defaulters, mortgage finance companies, Unemployment trends

This entry was posted on Monday, July 26th, 2010 at 11:03 pm and is filed under USA Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.