In the event of subprime mortgage crisis, the policies and standard procedures for lending highly at risked borrowers are now being criticized by subprime companies. The decrease of housing values has caused great net losses among subprime regulatory organizations. In one example, the Citigroup has reported a fourth quarter net loss of $9. 83 billion reflecting write-downs on subprime related direct exposures in fixed income markets and increased credit costs related to U. S consumer loans (McFall 44).
Another report is from UBS, the net losses of the company have exceeded to $12 billion due to the U. S subprime mortgage market, and approximately $2 billion net losses from U. S. residential mortgage markets (McFall 44). The public sectors, especially those under and planning to avail the program (e. g. individuals or families below or relatively equal to the poverty margin, high-risked individuals, etc. ), are now facing the threat of new legislations to be implemented among surviving subprime providers.
According to Ferguson, Hartmann and Panetta et al. (2008), the industry of Subprime has also experienced an increase in foreclosure rates ion 2006 to 2007, which overall triggered an economically alarming situation to the survival of subprime industries and associations related to the management of the mortgage system. According to Rubino (2003), subprime providers need to cope up and exhaust every possible resource to retain their service in the industry. In order to do this, various policy and standard modifications have to take place (60).
The identified potential changes on subprime mortgages can occur due to the confronting crisis, specifically (1) the added restrictions to borrowers’ capacity to pay and risk characteristics, (2) limiting the individuals that can avail subprime mortgage loans based on modified policies and standards, (3) increasing the interest rates and amortization fees as an effort of reviving the industry, and (4) reducing the terms of payment available for borrowers. Under the new lending system, most mortgage companies are likely to implement strict labeling precautions (e. g. red lining, unmortgageable properties, risky occupations, etc.
) towards properties that have risk characteristics. According to Badlock, Manning and Vickerstaff (2007), the need for mortgage lenders to maintain confidence and control risk has practical impacts on access to housing, since it is translated into a concern for the security of the loan (530). Swanepoel (2008) has pointed the halting of subprime lending in the third quarter of 2007 Wells Fargo Home Mortgage, and according to him, the foreseeable future of subprime borrowers with low income and high risked characteristics will definitely find it impossible to avail any home loan via subprime (108).
Careful examinations and assessments of the borrower’s capacity to repay and the standard-value assessment of the house and property are crucial standard precautions affecting the survival of mortgage industry. According to Swanepoel (2008), another potential danger of the crisis is the aversion that shall limit the loans to even higher-income homebuyers who have less than perfect credit histories (208). In addition, subprime companies are now considering strict precautions on investing on potential marketable lands.
According to Badlock, Manning and Vickerstaff (2007), houses liable to subsidence or flooding, or newly built houses on polluted land or on former waste sites giving off gases (e. g. methane sites, former factory sites, etc. ) are now judged too risky and unsaleable be lenders; hence, individual houses under these conditions are usually being avoided or rejected (530). Ferguson, Hartmann and Panetta et al.
(2008) have identified three systemic implications of the subprime collapse of new policy legislation, particularly (1) the collapse of the subprime market could precipitate a drop in housing prices that would affect the whole mortgage industry and probably the entire economy; (2) defaults on loans made to finance subprime lending might threaten core institutions; (3) the crisis of the subprime sector could cause reputational damage that might harm the rest of the mortgage and lending industry (83). Under this condition, homeowners currently under subprime payment might experience severe pressure on payment deadlines and dues.
Possible implementations of strict and higher penalties for delayed issuance of payment might also occur. According to Plunkett (2008), Subprime industries possess the option of either closing or passing the financial burden to their associates or potential borrowers through discrete tactics (133). Ferguson, Hartmann and Panetta et al. (2008) have mentioned that the trends of subprime demand are already decreasing after 2006 housing bubble, while the supply of houses are also decreasing due to the consequent effects of refinancing and coping process.
Currently, millions of refinancing borrowers from subprime mortgages are now experiencing multiple problems, such as (1) they may have agreed to very stiff prepayment penalties when they took out their current mortgages, (2) the current value of their homes is less than the amount they owe on their mortgages, and (3) they cannot meet the current stringent loan qualifications (Plunkett 133). New policy legislations for subprime burrowers, refinancers or potential investors are now facing the stiff and economically tightened sector of subprime mortgages. According to Ferguson, Hartmann and Panetta et al.
(2008), some subprime lenders are now practicing a predatory form of lending wherein homebuyers who really possess the potential of paying are offered with very low principal down payment, but eventually increase to 50% or more (84). This is considered as one of the legislative risk of the subprime modification, especially considering the absence of political reforms against such predatory selling strategy. Due to the impact of the 2006 real estate bloom, UNDESA has projected the possibility of policy retrieval for subprime providers on 2011 or more (16 to 17).
Tracing back the history of mortgage and lending industries, subprime providers have indeed encountered the similar scenarios and conflicts of abrupt economic variations and shifting of values. Conclusion In conclusion, subprime mortgage crisis of 2006 is now directing two possible implications among low-income earners and risky house buyers, particularly (1) the closure of their service to the public, and/or (2) the transformation of their policies and risk assessment measures, especially for burrowers who possess delinquent credit history, low-income conditions, employment issues, etc.
Considering the original purpose of the subprime mortgage industry, Subprime providers are now facing lesser alternatives for sustaining their industry. The sudden events, such as the shifting of house values, foreclosure increases (2006 to 2007) and the rise of inflation rates, have specifically directed the impact among those who are only capable of owning houses with low interest and monetary fees.
Currently, the new lending system of subprime providers is (1) implementing strict risk assessment measures, (2) predatory strategies for selling, (3) stiff prepayment penalties, (4) stringent loan qualifications, and (5) possibly increasing the monetary sources of subprime among its burrowers.
Baldock, John, Manning Nicholas, and Sarah Vickerstaff. Social Policy. Oxfordshire, U. S. A: Oxford University Press, 2007.