The subprime market is tanked and a lot of people are left in the wake thinking, what just happened? NAREE panelist Frank Nothaft, Vice President & Chief Economist with Freddie Mac reminds us that the typical homeowner with a subprime loan has a credit score below 650 and they are habitually late on bill payments – these are not people who are late once or twice. On the other hand, these are buyers who have been previously underserved by the market who are experiencing the opportunity to own the American dream for the first time.

Nothaft gave an overview of the subprime market.

  • In early 2006 we started to see early payment defaults and these increased throughout 2006
  • The eclipse occurred in 2007 with lenders going out of business and tightening standards
  • Interest only and negative amortized loans grew to 1/3 of all originations in 2005
  • Subprime origination volumes accounted for 20% of originations and 15% of outstandings in 2006
  • Subprime loans accounted for 8% of loans in 2001 and 33% in 2006
  • ARMs, interest only ARMS and low-doc/no-doc loans accounted for a rising amount of subprime loans
  • In 2006 81% of loans were ARM hybrids
  • 6 months after origination, 2.5% of loans are in foreclosure
  • Over 1 million loans will enter the foreclosure process in 2007 — 60% of these are subprime

All of that said, the picture is not gloom & doom. Freddie Mac has a number of programs to address these issues.

  • Freddie Mac will purchase up to $20 billion in new ARM and hybrid ARM products to be introduced by mid-summer 2007
  • Tougher standards will be instituted – loan officers will make sure that buyers can afford the full rate inclusive of taxes, insurance and PMI — not just the advertiser “teaser” rate
  • Limit lo-doc and no-doc loans
  • Foreclosure prevention – 80% of the deliquent buyers who enter the Freddie Mac workout program are more likely to avoid foreclosure –the equals 40,000 – 50,000 families per year
  • Homeowner education through programs such as “Don’t Borrow Trouble” and CreditSmart(R)

An interesting and positive fact pointed out by another NAREE panelist, Douglas Duncan, SVP and Chief Economist for the Mortgage Bankers Association is that 35% of homeowners own homes that are completely paid for without any loan. More importantly, of the remaining 65% of homeowners that have a mortgage, only 5.1% of them are subprime loans. How the subprime mortgages are handled now and in the future will remain of interest to new home builders, developers and trades.

Carol Flammer is President of Flammer Relations, Inc. an Atlanta area Public Relations firm specializing in real estate, business to business and nonprofit accounts.

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