Everything old is new again. The subprime mortgage, blamed for the rush of mortgage defaults and foreclosures that triggered the housing collapse of a few years ago, is back, targeting the same people who lost their homes in the first version and threatening a another round of defaults and foreclosures for vulnerable homeowners. The current version begins with seller financing, an old arrangement that eliminates the middleman between seller and buyer. But the modern version has some new twists that put homebuyers – and the markets – at risk
Before the housing crisis of 2008 or so, most people had never heard of a “subprime” mortgage. But as more and more homeowners were hit with suddenly ballooning payments and fell into foreclosure, this loan strategy made headlines. During the housing boom that preceded the crash lenders made loans available to virtually anybody – even those with iffy, or subprime, credit ratings and unstable employment histories. Many of these borrowers, eager for the opportunity to own a home, didn’t understand the terms of these loans, which provided initially low rates and payments that soon loomed much larger. The result? Missed payments, homeowners in crisis, and ultimately foreclosure on the home that had seemed so easy to buy.
After the collapse, mortgage lending came under greater scrutiny, and a flurry of suits, settlements and new regulations reined in the worst of the fraudulent practices and extravagant lending that had put so many homeowners into trouble. But although banks and other lenders in the industry put more stringent requirements in place, new strategies in seller financing create conditions for a new version of the old subprime mortgage, targeting those who lost homes In the first round and can’t qualify for a traditional mortgage
under current conditions.
Generally, those homeowners bitten by the foreclosure crisis have been locked out of homeownership for at least a few years, but seller financing arrangements ignore poor credit and a foreclosure history. This isn’t a new phenomenon, of course, but since more and more third party companies are taking over the arrangements made between buyer and seller, the process is beginning to look a lot more like the old subprime lending.
Although traditional seller financing has been arranged privately between buyer and an individual seller, the new version involves a company that purchases foreclosed homes for low prices and then resells them to buyers with questionable credit. This process does get some buyers back into the housing game, but it comes at a cost: sky-high interest rates and severe penalties for missed payments.
These features have some industry observers concerned that the same homeowners at risk in the first subprime crisis may be facing a similar situation again in their rush to buy another property. Although this kind of lending probably won’t trigger a collapse similar to the original crisis, the potential for another round of foreclosures hitting former homeowners from the first version may affect local markets — as well as the investors following Jason Hartman’s guidelines for creating wealth through investment properties. (Top image: Flickr | cliff1066)
The American Monetary Association Team
