The way that subprime lending practices, and some call predatory lending practices affect the housing market has yet to be realized on such a large scale, as these tactics have always been carefully controlled by lending institutions, due in large part to their historical long-range view. Subprime lending on the other hand is fundamentally not a long-term view practice; it is a short-term tactic that is now being dealt with on a massive scale as foreclosures mount and more and more families see foreclosure looming in their future and more and more banks take on this debt, with the added burden of holding on to mortgages that far exceed the new depleted value of homes as the market corrects naturally from the housing bubble. The marketing for such subprime lending was absolutely saturated as nearly every individual was admonished to buy a home or refinance their home before the extremely low interest rates began to rise again and before housing prices were even further out of reach. Lending institutions, even the big name banks, in an attempt to compete with the fly by night unscrupulous agencies began to adopt their tactics, likely with much internal pressure to market and lend in situations that previously would have been unheard of. ARM mortgages, low down payment mortgages and introductory interest rate loans, usually relegated to much smaller lending situations like auto loans became par for the course and individuals are now struggling to pay for them and banks are sitting on loads of debt, offset marginally by federal assistance. It seems that from 2000 on the marketing for subprime lending loans was unending, and lending institutions were not lying, they really were lending at unprecedented levels. In general a; "predatory "loan" generally refers to a loan that takes financial advantage of an unsophisticated borrower who has accumulated equity in his or her home, but who may be unable to repay the obligation," (Ornstein, Tallman & Holahan, 2006, p. 54) but many argue that the pressure to compete with unscrupulous lenders demanded that traditional lenders relax their lending practices and to some degree in doing so they became predatory lenders.
Increased use of Variable Adjustable Mortgages.
This is supported foundationally by the increased availability of ARM mortgages, especially among low income families and even in the middle classes where real wages had not adjusted to the new cost of buying a home during the housing bubble. (Weller, 2006) the rise in Adjustable mortgages is most prominent amongst low income families, likely because they were historically most likely to be turned down for a traditional mortgage, and therefore the area was a previously untapped market, though many would argue that the market was untapped for very good reasons. The growth in ARMs between 2000 and 2004 accounted for about two-thirds of the relative increase in variable interest debt. (Weller, 2006) According to Woll this increase in opportunity and loan product offerings was as a result of the lending institutions desire to retain growth of the previous years and maintain a really high operational infrastructure, that they had developed during the housing boom. "So in order to feed that operational capacity, new products were seen as a way to attract new consumers." (2007, p.52) There is no sense that this makes a great deal of long-term sense, to grow and industry that should have naturally declined but nonetheless that is what happened and now consumers above all others are paying the price for excess.
Rising Interest Rates.
Because of weakness in other areas of the economy monetary policy was loosened in 2002. Regarding economic growth and inflation this was very positive; however it ignored the implications for the housing market. Low interest rates were a stimulus for those on low income and bad credit records to buy a house for the first time. However as interest rates have increased from 1% to 5% it has increased the cost of mortgage payments for homeowners. For example a 2% rise in interest rates can increase the cost of mortgage interest payments by 40%. (Killelea, 2010) That extreme of an increase in mortgage payments will be felt for some time, even as those who might have been eligible for fixed rate and traditional mortgage structures sought to borrow as much as they could given the rosy sales tactics and the fundamental ideation that the housing boom and a great national economy would continue to rise indefinitely, despite real evidence of the fallacy of this false sense of security, in part brought on by marketing of subprime lending options.
This trend of subprime lending and the current financial crisis is also reflective of massive housing market speculation, where individuals who were not receiving the kind of percentage returns associated with the stock market began to heavily invest in property. This challenges every aspect of the market, including but not limited to rent rates and other things that have traditionally always fallen in line with mortgage prices and other economic trends. (Killelea, 2010) the real decline in this area will likely be seen as a significant change in the market, as developers and investors seek ways to exit, with no real exit strategy as when the demand decreases (as it should have years ago) and lending gets tight (as it should have years ago) there is less ability for those invested to get a return on their investment. Some of the most ardent investors are seeing substantial losses in net worth and for those on the riskier end of the speculation market bankruptcy risk and reality. (Leonard, 2010) Even some of the more traditionally conservative lenders put far to much speculative capital in the mortgage market;
The boom and bust in the housing market precipitated serious strains in financial markets. These strains resulted in the onset of the financial crisis in August 2007 with the collapse of the asset-backed commercial paper market. This collapse occurred because the solvency of a number of large financial firms was threatened by huge losses in complex structured financial securities. Why did these firms have such high concentrations in mortgage-related securities? Given the information available to firms at the time, these high concentrations in mortgage related securities violated basic principles of modern risk management…this failure to apply well-understood risk management principles was a result of principal agent problems internal to the firms and to breakdowns of corporate governance systems designed to overcome these principal-agent problems. (Lang & Jagtiani, 2010, p. 123)
The result of this have yet to be fully realized as many investors and lenders playing in the speculation market are simply hoping to ride out the downturn and recover in the future, but this is largely a pipe dream as real housing assessments decline further and are not likely to fully recover for some time to come.
In 2007 some economists were still feeling considerably sunny about the situation. The economist Joe Light of Money magazine claimed that the housing market was cooling of considerably and yet at the same time the laws of supply and demand still dominated, if demand is high and availability is low prices will still grow. He also contended that where the economy was still strong the housing market was still strong. One important observation that Light makes is that the bubble market, which is the description many have given to the exponential market gains of the past 15 years, is in danger of popping if developers sell to each other at inflated prices, which many did to share the decline and attempt an artificial exit strategy. He stated that when you begin to see rows of for rent signs, or for sale signs that stay up for a very long time, there is cause for worry, and this reality was largely realized all over the country since his assessment in 2007. In this sort of market the home owner should be prepared to hang on to what they have until the market stabilizes. In one observation, of interest he detailed a community that still has growth rate in the market as a result of other regional markets being inflated. (Light, 2007, p. 53-54) in retrospect the situation got far worse than was expected and we have yet to realize even marginally the rapid recovery that was hoped by some
It is also important to note that many economists in the 2007 and even later decided to take a regional approach to the situation, seeking out markets that were least affected and those who were most affected to try to make sense of the mess. Gopal from Business Week noted in 2007, that regional differences in the housing market are important, and that the NE seems to be faring better than other regions, in his opinion, because the down turn began in that area before others. For this economist this was evidence that recovery will begin soon in other areas, but…