Mortgage Debt Reduction
An Unprecedented Need for Mortgage Debt Reduction
How Did We Get Here? – A History of Mortgage Lending Practices
It is rare for someone to pay all cash in a real estate transaction. Historically, a prospective homeowner would go to their local bank to obtain a mortgage. The borrower paid about 20 percent down on the purchase price and borrowed the other 80 percent from the local lender. In return for a commitment to provide the financing, the lender received a mortgage on the property. That original lender held the mortgage until the loan was paid off. The funds provided by the lender for this loan came from others in the community making payments.
In 1938, Congress established the Federal National Mortgage Association (Fannie Mae) and in 1970, the Federal Home Loan Mortgage Corp (Freddie Mac). Together these programs were essential to the launch of a secondary market in the 1980s, known as the Mortgage-Backed Securities market. In the Mortgage-Backed Securities Market, loans were transferred, pooled, sliced and sold as securities. There was no longer one intact mortgage, but several pieces held by different investors. The result was an increased supply of capital because the money for loans was no longer coming just from the local community but often global investors. This resulted in greater liquidity in the market and reduced interest rates. Put simply, it meant more money for more loans.
This secondary market continued to grow and change into the 2000’s. Accompanying these changes was a desire to extend homeownership.
Securitization Leads to the Emergence of the Sub-Prime Market
The growth of this efficient second market led to a new type of mortgage. Originally, to obtain loans borrowers had to meet certain credit qualifications. The creation of securitization drastically increased the availability of mortgage loans and the standards for meeting lending requirements plummeted.
Prime Market vs. Sub-Prime Market
In the past, under the Prime Market there was essentially a one-size-fits-all loan, with qualifications depending on credit ranking, job security, and earnings. Basically you qualified for a loan or you didn’t. These loans had a fixed interest rate with the amount of each payment remaining the same for the life of the loan (15-30 years).
Under the Sub-Prime Market, loans became available to people with low credit scores and sometimes unverifiable income. The lenders lowered the requirements to the point where there were almost no credit qualifications. These sub-prime loans typically came with low ‘teaser’ rates for two years, then much higher rates for the rest of the term. Many borrowers were “qualified” for loans that they would be unable to afford once the teaser rates increased. Borrowers often took loans for more than 100 percent of the value of the mortgaged property.
The House of Cards Collapses
Beginning in 2000, there was a dramatic growth in sub-prime mortgages, with roughly 75 percent having short-term teaser rates. The availability of more loans led to increased home prices, with prices rising by over 80 percent between 2000 and 2006. As long as home prices continued to rise, the shaky foundation of mortgage debt was concealed.
Unfortunately, in 2006-07, the bubble began to burst, causing prices to drop 32 percent between 2006 and 2009. Borrowers with sub-prime mortgages were disproportionately hurt and began to default on their loans. An economic slowdown and deep recession led to unprecedented waves of mortgage default and foreclosure. Sales of homes slowed, but 100,000 homes continued to be constructed every year, leading to an even sharper dive in housing prices.
Main Groups Falling Victim to Sub-Prime Market
- People Refinancing
- New Homeowners
- Investor Population
Impact Resonates Throughout Economy
As foreclosures on sub-prime loans continued to rise, lenders were then forced to repurchase these loans. Banks no longer had money coming in, so they limited credit to residential and commercial borrowers. Without commercial credit, many small businesses began to default on their loans and lay off their employees, causing consumers to have to redirect their spending.
This redirection in consumer spending soon affected the prime market because businesses not only stopped expanding but began contracting, leading to more layoffs. The effects of the sub-prime market’s crash rose through the classes and the unemployment rate skyrocketed, leading to default and foreclosure on prime loans.
If you have found yourself victim to the housing crisis and your mortgage has become unaffordable, or your house is significantly upside down, a mortgage debt reduction with the help of an attorney may be your answer. ContactMcCarthy Law today for a free consultation with a lawyer.