Subprime What?

Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market.

For the benefit of my readers that don’t know the full extent of what subprime lenders are and how they can affect housing and the economy, here’s a quick update on what’s going on with subprime lenders.

Subprime lenders supply loans to home borrowers with less-than- stellar credit ratings. In 2005 and 2006, if a home buyer in the U.S. could not get a mortgage at one of the major American banks because of past problem credit, they would go to a subprime lender to the get the loan, paying inflated interest and high fees. As the housing market boomed in 2005, so did the business of subprime lenders.

Here are some interesting facts that point to big economic problems ahead, courtesy of the subprime lenders:


— Depending on which study you believe, subprime mortgages make up 20% to 25% of all U.S. home mortgages at present.

— 10% of subprime loans are now more than ninety days late — the highest level since 2001. (Source: Senate Banking Committee Chairman Christopher Dodd.)

— One in five subprime loans will end up in foreclosure. Over two million Americans will lose their homes because of it. (Source: Centre for Responsible Lending.)

There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. U.S. homebuilders will need to get used to lower demand for the houses they build because the buyers will have a difficult time getting the financing they need to buy.

The worst of our problems because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.

NEWSFLASH — The second largest home mortgage lender in the U.S., Freddie Mac, reports it will stop buying subprime ARMs and will require its own borrowers to prove evidence of income for future new loans. Companies like Freddie Mac purchase portfolios of loans put together from subprime lenders. The message here: It will become increasingly difficult for borrowers with less-than- stellar credit ratings to get loans. This will result in lower demand for housing and, eventually, lower prices, too.