Stats reveal that subprime mortgage industry was rising quite rapidly as up to last year 13.5% of the mortgage originations in the country were subprime in comparison to 2.6% in 2000. And overall it was a whopping 20% of the $13 trillion mortgage market in 2006.
Along with the rise in subprime lending, delinquencies for these loans has also jumped to 13% last year from 8% it was a year earlier. And the foreclosure rate is also currently 25% more than what it was the previous year. As per director of supervision & consumer protection of Federal Deposit Insurance Corporation there are about subprime loans to the tune of $1.28 trillion still outstanding. And some $1 million mortgages would have interest rate resets this year resulting in delinquencies to rise.
The cause for this high rate of delinquencies & foreclosure many believe is abusive lending and fraud by subprime lenders. But now U.S. Office of the Comptroller of the Currency is trying to take corrective steps to improve the lending standards which had slipped and resulted in this subprime lending crisis. Banks have now been directed by FDIC, Fed and other regulators to analyze their underwriting standards and make customers more aware about risks involved with certain type of loans and make sure that customers are able to repay.
These delinquencies and foreclosures are threatening to worsen the housing recession which has already started to weaken the economy. Deteriorating subprime market has also caused subprime lenders to go out of business and many have filed bankruptcy.
The subprime crisis in the US mortgage market is also not good news for investors in residential mortgage-backed securities (these mortgage-backed securities account for about 20% of world wide fixed income market). Many such investors were drawn into these more risky subprime sections of mortgage-backed securities which yielded higher payoffs.
The rate of defaults by borrowers is resulting in calls in Congress for legislation. But Ben Bernanke (Chairman, Federal Reserve) is of the opinion that though this crisis has caused financial problems for families as well as many lending institutions, it will not have significant affect on the overall economy.
To correct the situation, regulators now are taking enforcement measures with main emphasis on lenders to themselves lend selectively such loans in which costs climb after low introductory rates. Additionally, some senators intend to bring legislations which would help crack down predatory lending practices. But it needs to be taken care of that such legislations do not discourage responsible subprime lending which actually helps people buy home, who would otherwise not qualify for conventional loans.