Subprime Mortgage Market Was an Thesis

Excerpt from Thesis :

The term "adjustable-rate mortgage" describes any mortgage with an interest rate and payments that adjust according to some formula agreed upon by the borrower and lender. ARMs have been generally available to borrowers for about three decades on prime mortgages, but variants have been common to subprime mortgages over the past 10 years. The traditional ARM linked the mortgage's interest rate to the LIBOR plus several percentage points." (Utt,2008)

Alt -- a Mortgages. Sometimes referred to as a "low-doc" mortgage, an Alt -- a mortgage is structured like the other mortgages described in this section but is made available only to prime borrowers or those with FICO scores above 660. However, these prime borrowers were required to offer only limited documentation on their qualifications, so many may not have been as "prime" as they represented themselves to be, as subsequent default rates indicate." (Utt, 2008)

Extremely Low- or No-Down-Payment Mortgages. As home prices appreciated and as mortgage originators and lenders looked to expand their pool of potential customers beyond those with sufficient savings and net worth to make the required down payment (generally 5% to 20%), lenders and investors began to offer and buy mortgages with little or no down payment. Sometimes they provided more than 100% financing by allowing buyers to borrow a portion of their settlement costs." (Utt, 2008)

Interest-Only Mortgages. Most mortgages today are fully amortized, meaning that each monthly payment covers both the interest and a portion of the principal. Over the life of the mortgage (typically 30 years), the principal amount will gradually be paid down to zero. (Utt, 2008)

Negative-Amortization Mortgage. A negative-amortization mortgage is much riskier than an interest-only mortgage because the initial payments do not cover all of the interest, so the interest deficiencies are added to the loan's principal, which increases over time along with the borrower's indebtedness. Once the flexible payment period ends, the monthly payments are even larger because the loan amount has increased and the amortization period is shorter. Risks to the lender are more severe than the risks that are encountered with interest-only mortgages." (Utt, 2008)

The subprime market while it is certainly in the midst of an extreme crisis did allow individuals who would not have the chance of buying their own home that chance and while many individuals lost their home due to foreclosure or default there are lessons learned from this situation which might be effectively applied in the future. Utt states that while the standards were greatly relaxed that it did seem "appropriate at the time and provided important economic benefits for all involved. An obvious benefit is that as many as 4.5 million additional homebuyers and borrowers generated new business and revenues for real estate agents, mortgage agents, real estate and mortgage brokers, and commercial banks. The many participants in the subsequent securitization process earned fees for each packaging and repackaging as the risks were sliced and diced to tailor securities to each investor's needs. On top of this was the boom in refinancing for those who already owned their homes but were attracted to better terms and the opportunity to convert home equity to cash. A less appreciated benefit of the diminished underwriting standards was the reduction in costs for many involved in the process. The advent of no-documentation ("no-doc") loans in which borrowers are on the honor system to provide information on their incomes, assets, debts, and credit and employment histories saved the lender/investor the considerable expense of establishing the borrower's suitability, which involves sorting through and verifying the copious documentation by calling or writing employers, banks, brokerage firms, utilities, and other parties. Reducing these and other loan origination costs in the due diligence process increases the profit from a given stream of revenues." (Utt, 2008) Predatory lending additionally played a role in the housing market crisis and which is defined as a practice of seducing the borrower "to borrow 'too much'."


In actuality, the subprime mortgage industry might still be spinning out mortgages for risky financing if the subprime industry itself not noted that the that the housing market was in trouble and in fact, it was the fact that borrowers on subprime mortgages and in fact that many of these "went into default" and upon the investors, investment advisors and regulators becoming convinced that the subprime market had trouble" then the subprime housing market officially collapsed. It was in fact, the very individuals that had engaged in predatory lending who also signaled the collapse of the housing market and while President Obama's provisions contained in the Stimulus plan will assist some homeowners there are still the many who have lost their home and for which there is no remedy.


The recommendations of this study are that this area of study be examined further and additionally. Also recommended for additional research are the industry's regulations and adherence to these regulations by the subprime mortgage lending industry.


Cite This Thesis:

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