The Lessons of the Subprime Debacle
The loose lending practices of the last few years had clearly come home to roost at the time this book was published. So many borrowers with bad credit histories had been given loans in the subprime category that the increase in interest rates that began in 2004 started to worsen an already risky situation for the lending industry.
The Mortgage Bankers Association said in April 2007 that subprime loans amounted to about 20 percent of the nation's mortgage lending and about 17 percent of home purchases in 2006. It has been estimated that financial firms and hedge funds likely own more than $1 trillion in securities backed by subprime mortgages.
Before you run into the foreclosure market thinking you're going to pick up a bargain, take another look at Chapter 19. Foreclosure investing in almost all its flavors is for professionals who deal mainly in cash.
As of May 2007, RealtyTrac, an Irvine, California–based online market-place for foreclosure properties, reported that foreclosures were up 90 percent from May 2006 figures.
“After a barely perceptible dip in April, foreclosure activity roared back with a vengeance in May,” said James J. Saccacio, CEO of RealtyTrac. “Such strong activity in the midst of the typical spring buying season could fore-shadow even higher foreclosure levels later in the year. Certainly not every community nationwide is seeing an increase in foreclosures, but foreclosed properties are becoming more commonplace and adding to the downward pressure on home prices in many areas.”
SELECTED FORECLOSURE STATISTICS BY STATE (MAY 2007)
State |
Foreclosure Increase from May 2006 |
Alabama |
89.91% |
California |
353.9% |
Connecticut |
237.8% |
Delaware |
922.2% |
Florida |
143.9% |
Idaho |
132.6% |
Iowa |
197.1% |
Louisiana |
222.1% |
Maryland |
579.2% |
Massachusetts |
626.8% |
Mississippi |
291% |
Nevada |
372.6% |
Ohio |
152.2% |
Rhode Island |
160.4% |
Virginia |
411.5% |
West Virginia |
116.9% |
Nevada registered a May foreclosure rate of one foreclosure filing for every 166 households — the nation's highest for the fifth month in a row and nearly four times the national average. The state reported a total of 5,235 foreclosure filings during the month. Colorado documented the nation's second-highest state foreclosure rate, with one foreclosure filing for every 290 households. The state reported 6,321 foreclosure filings, an increase of more than 50 percent from May 2006. California documented one foreclosure filing for every 308 households, more than twice the national average.
There is an appropriate use for subprime loans, and the key word here is temporary. If you want to get the lowest rate possible, you have to make sure your other prospects are healthy — your income picture as well as your credit picture. Of course, don't do anything in subprime if there are prepayment or refinancing restrictions; if you do, you're defeating the whole purpose.
As the real estate industry has sunk into these troubles, there's been plenty of blame to go around. The National Association of Realtors testified in mid-2007 that “abusive lending” had led to the troubles in the industry and called for “solutions that afford the homebuyer greater protection.” It was unclear at publication time whether the government would act on these requests, but there were already casualties on the lending side as well.
Most notable was the nation's number-one provider of subprime loans, New Century Financial Corp. of Irvine, California. In April 2007, the company filed for Chapter 11 bankruptcy protection trailing criminal probes into its operation.
