A little more about “sub-prime” loans and the recent economic “crisis”
Posted by Mike Sylvester - 10/12/08 @ 7:56 am - Filed Under National Politics
Much of the current financial “crisis” can be blamed on the explosion on sub-prime loans. Sub-prime loans are those loans made to people who have a higher risk of default than those Americans who are considered “prime” borrowers.
Consider these facts:
- In 1994 5% of the home loans in the US were “sub-prime” loans.
- This rose to 9% in 1996.
- It rose to 13% in 1999.
- It rose to 15% in 2001.
- It rose to 20% at its peak in 2006.
The increased number of sub-prime home loans are mostly attributable to the Clinton and Bush Administrations. In fact, the rise in sub-prime loans occurred evenly over the time that Bill Clinton and George W Bush were President.
Lenders have always charged sub-prime borrowers a higher rate of interest in order to protect themselves from the higher rates of default; this makes good fiscal sense.
In 2001 sub-prime borrowers had to pay an interest rate that was on average 2.8% higher then what prime lenders had to pay. Inexplicably this dropped to 1.3% in 2006.
The explosion in sum-prime loans caused home ownership to rise significantly. Historically (1970 - 1995) about 64% of those living in homes owned them.
The growth of sub-prime loans increased this by allowing people who historically could not purchase a house to actually purchase a house.
Home ownership rates in the US peaked between 2004 and 2006 with home ownership rates varying between 68.2% and 69.2%. In the last couple of years this number has slowly dropped (Mainly due to foreclosures) and it was 68.1% as of June 30th, 2008.
I imagine that home ownership rates will return to about 64%. This means that I think home ownership will decrease from 68.1% to about 64% over the next few years. If this happen it means between 5% and 6% of Americans will lose their homes.
Mike Sylvester
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13 Responses to “A little more about “sub-prime” loans and the recent economic “crisis””
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Mike, It looks like R&F doesn’t agree with you.
http://reverentandfree.blogspot.com/2008/10/proposed-mike-sylvester-doesnt-know.html
It looks like the FACTS don’t agree with you, Mike.
As usual.
Mike,
Are the percentages you give just fed bank insured loans or all home mortages? From reading around on the Internet my guess it is a compos. percentage.
Mike, you may be able to answer this also.. Is I true that even mortages written by state lending firms ended up in the mix? Also private mortage houses that sold their mortages to insurance companies or some other operation minus fed banks would still be in the mix?
I have assembled a list of the various mortage types, that the layman will understand, from reading on the internet. Looks like there is a ton of people/groups that all had their fingers in the mess. It is interesting the problem in California is not like the Fla. problem. The Fla. problem is not the same as the Las Vegas problem.
Thanks for answering the questions ahead of time
Penny Wise,
Craig at Reverent and Free is much better at English grammar then I am. His assertions about the economy are ones that a 7th grader could easily disprove.
Dammian,
Please let me know ONE fact in my post you do not agree with. Just one…
Craig points to one portion of my post and disputes it; that being said Craig is completely wrong.
Fannie and Freddie currently hold 50% of the home loans in the US. They are the largest players by far in the US mortgage industry. When Fannie and Freddie lowered their lending standards many other institutions in turn lowered their own lending standards in order to compete with Fanie and Freddie. This has been well documented by many sources and is easily unerstood by anyone who understands business.
Craig fails to grasp this basic concept.
JQ Taxpayer,
The percentages are of total home loans. I am not sure of the answer to your other questions.
Mike Sylvester
I used to work in the Secondary Marketing Department of a bank. We sold all our mortgages to Fannie and Freddie. Occassionally, we would use some other minor player as leverage to push Fannie and Freddie to change their rates, but in the end we almost always sold to one or another (Fannie much more than Freddie at the time, the mid 1990’s).
I think where people are getting hung up on is your 20% of “subprime” loans. People need to drop the concept “subprime” loans where made only to lower income people.
In California (the leader of subprime loans) did include those that where on the low end of the income bracket. But it also included people all across the housing market from $300,000 to $1,500,000 homes.
Some of these people sold themselves down the drain in thinking the rising price of homes would just continue and hence they could make a big buck within 3-5 years of their Ajustable Rate Loan would reset. They went into these loans with little or nothing down. They had “teaser” rates that where even current interest rates at the time they obtained the mortage.
You had people playing “Flip That House!” You purchase a house for one price, put in a few thousand bucks in upgrades and sale in within 90-120 days for a huge profits. That market died and many where left holding the mortage on the “flip house” and the home they lived in.
Some people sold their financail worth to get into the “special home!” They took out front loaded loans with 1% interest rate for a few years. They knew if they did not sale the house within that period the loan rate would go to 10% or higher. These people where bright enough to know what they where walking into but greed drove them to do it.
They figured in a year or two they would sell the house, make a huge profit, and walk away but a big bank account. Then they planned on purchasing a bigger house they figured they could afford. They saw no end to their rise in the home they lived in. Well the housing market dropped, they got stuck, and are trying to pay on a high interest loan.
Go to Florida. The Condo nightmare of mortages crisis is because of greed and making a fast buck.
Who do we blame. Well, just about everyone outside of the people who are going to end up paying for this mess. J. Q. “average” Taxpayer is going to be paying for everyone’s greed from a few on Main Street, to Congress, to the White House, to Wall Street.
Some people walked in, with eyese wide open, knowing they faced great financial hurt if the market slipped at all. Other people got conned. This housing problem is not isolated to the those just on the lower end of the income bracket! Greed drove this problem and greed knows no social/economic boundries!
JQ,
Sub-prime loans are those made to people with sub-standard credit. Many people with sub-standard credit make quite a lot of money.
Mike
Mike,
The Community Reinvestment Act was designed to encourage commercial banks and savings associations to meet the needs of borrowers in low- and moderate-income neighborhoods, not the wealthy with bad credit. It was signed into law by President Jimmy Carter in 1977, and in July 1993, President Clinton asked regulators to reform the CRA to “deal with the problems of the inner city and distressed rural communities”.
That’s hardly where those that “make quite a lot of money” hail from.
Mike,
You are so right…. subprime applies across the income brackets.
CRA == 25% of banks giving out bad loans.
Sorry, doesn’t work. Keep looking for a way to blame minorities, though; it works better than anything I can say to paint you as the racist sub-human scum you are.
Damian,
Your an a-typical liberal. When you cannot prove your point, whether through lack of education or stupidity, (I suspect both) you resort to name calling.
Damian,
If you look at what Mike stated I do not think you see the word as bank and 25% connected. I even asked about that and Mike restated that he was talking about loans.
Loans are made by mortgage brokerage firms, banks, credit unions, insurance companes and several other places of credit. Banks are just one part of the lending group.
Mike and I exchanged posts on here of some of the types of “subprime” loans that do not include those of lesser income. We never have talked about minorities, unless you have redefined that word!
Pennywise & J.Q., You’ll note Damian lacks the requisite tools necessary to see a “big picture”.
In his (and millions of other libs) narrow view of life, all they see is the unfairness of their particular lot in life.
It sucks to be poor, but it really sucks to be poor and ignorant too, cuz you’ll more than likely stay that way the rest of your life. I would submit the democrat party is made up of two factions, the angry poor with their hands out, and the elite rich who can afford toassuage their inherited/married wealth “guilt” by supporting socialist memes.