US Subprime Mortgage Crisis
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US Subprime Mortgage Crisis is one of the main reason behind the current financial crisis. Subprime mortgage led banks to accrue unprecedented loss. Many investment banks went bankrupt (Lehmann Brothers). This was coupled with plunging property price. Subprime mortgages were very popular in America. By the year 2005, almost 1/5th of the total number of mortgages were subprime type. It became the means for millions of immigrants to own a dream house in US. But before going into any further details let me explain what this subprime lending actually is? Subprime Lending - what is it? There are many borrowers who don't qualify for prime loans due to their non-compliance with the Fannie Mae or Freddie Mac guidelines. Some of these guidelines: • If the credit rating is low • Fraudulent/faulty/inadequate paper works and documents • Prior history of default in loan repayment Subprime mortgage loans are meant for this section of borrowers. These loans are basically characterized by the following repayment structure 1. For the first two years mortgage repayments remain fixed. After two years repayment amount almost doubles 2. Interest rate changes from fixed rate to adjustable rate mortgage which in turn depends on Fed rate
Recent Action/Legislation The House of Representatives, on September 18, 2007, approved a plan to allow the Federal Housing Administration (FHA), to back refinanced loans for tens of thousands of borrowers who were delinquent on payments because their mortgages are resetting to sharply higher rates from low initial "teaser" levels. The previous week the Senate passed legislation proposed by the Senate Banking Committee under Chairman Christopher Dodd, D-Connecticut, titled the Building American Homeownership Act of 2007, that included $200 million in aid to nonprofits and other groups that offer counseling and information to help homeowners avoid foreclosure (AP, September 18, 2007).
Both bills call for a series of revisions to the federal loan program, including the following that were passed by the House Financial Services Committee (HFSC): • Lower down payments: Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment. • Housing counseling: Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments. • Subprime borrowers: Directs the Federal Housing Authority (FHA) to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers. • Reverse mortgages: Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans. • Multifamily loans: Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities. • Affordable housing fund: Authorizes up to $300 million a year from the bill's excess profits for affordable housing, instead of returning such funds to the General Treasury. • Higher loan limits: Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95 percent of the median home price in each local area and shut FHA out of higher cost home markets.
Recent Action/Legislation The House of Representatives, on September 18, 2007, approved a plan to allow the Federal Housing Administration (FHA), to back refinanced loans for tens of thousands of borrowers who were delinquent on payments because their mortgages are resetting to sharply higher rates from low initial "teaser" levels. The previous week the Senate passed legislation proposed by the Senate Banking Committee under Chairman Christopher Dodd, D-Connecticut, titled the Building American Homeownership Act of 2007, that included $200 million in aid to nonprofits and other groups that offer counseling and information to help homeowners avoid foreclosure (AP, September 18, 2007).
Both bills call for a series of revisions to the federal loan program, including the following that were passed by the House Financial Services Committee (HFSC): • Lower down payments: Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment. • Housing counseling: Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments. • Subprime borrowers: Directs the Federal Housing Authority (FHA) to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers. • Reverse mortgages: Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans. • Multifamily loans: Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities. • Affordable housing fund: Authorizes up to $300 million a year from the bill's excess profits for affordable housing, instead of returning such funds to the General Treasury. • Higher loan limits: Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95 percent of the median home price in each local area and shut FHA out of higher cost home markets.
