The subprime mortgage market has been roiling the stock market and causing major concern for the impact on the larger economy from a significant upsurge in the number of foreclosures of homes in the subprime market.
Subprime mortgage use instruments such as interest-only loans, teaser rates and adjustment rate mortgages (ARMs) for borrowers whose credit history is not sufficient to get a conventional mortgage.
Mississippi Realtors are deeply concerned about the high rate of subprime adjustable rate mortgages in default in Mississippi, says Angela Cain, CEO of the Mississippi Association of Realtors.
“We believe that financial education is an important defense against abusive lending practices,” Cain says. “It’s important that homebuyers, especially first-time buyers, have an understanding of the different types of available mortgages and how to avoid the pitfalls and entrapments of predatory loans. Realtors can help in that education process.”
Cain says while it is important to note that while abusive lending does occur primarily in subprime markets, not all subprime loans are abusive or even problematic.
“In fact, responsible subprime lenders have played an important role in helping thousands of Mississippians achieve homeownership,” she says. “That’s why we support federal legislation and regulation that prevents predatory lending while maintaining a role for responsible subprime lending.”
The growth in the subprime market has been dramatic.
“Fourteen percent of all first-lien mortgages are currently classified subprime representing some 7.5 million loans,” says Stacey Wall, president and CEO of Pinnacle Trust, Ridgeland. “So-called near-prime loans — loans to borrowers who typically have higher credit scores than subprime borrowers but whose applications have other higher-risk aspects — account for an additional 8% to 10% of mortgages. While the expansion of subprime mortgage lending has made homeownership possible for households that in the past might not have qualified for a mortgage, the risks of a crash in the subprime lending market are substantial.”
Wall says too many defaults in mortgages lead to tighter lending standards, which lead to a downturn in home values. That is followed by homeowners feeling less wealthy so they spend less, which weakens the economy.
Randy Burchfield, director of marketing at BancorpSouth, says BancorpSouth has never focused on this market segment and has no direct exposure to the problems in this market.
“However, from a statewide standpoint, the Mississippi market will be directly impacted,” Burchfield says. “The Mortgage Bankers Association recently reported that 20.2% of total subprime loans in Mississippi are past due, and that 8% of these loans are 90 days or more past due. The same report estimated that 22.6% of subprime loans with adjustable rate mortgages in Mississippi are past due. And of that number, 89% are 90 days or more past due. So, yes, our state is being directly impacted by problems in the subprime market, as practically all states are.”
Burchfield says concerns are not just that this could lead to higher interest rates on these loans, but underwriting standards on them are being tightened so that fewer people will qualify for the loans. And as foreclosures increase as a result of mortgage defaults, the residential real estate market will slow down markedly.
Dr. Ken Cyree, Frank R. Day-Mississippi Bankers Association chair of banking at the University of Mississippi, says the largest number of foreclosures is occurring in bigger urban areas of the country where housing is very, very expensive — big cities in Florida and California, for example.
“Mississippi is largely insulated from the problem,” Cyree says. “That said, there are some banks with subprime mortgages in Mississippi. The biggest problem is if it spills over and raises interest rates.”
Rising interest rates are often bad for the stock market. Overall, rates are still relatively low. But Cyree says everyone is jittery because it is unknown how big the problem is, and what impact it could have spilling over into causing other economic problems.
Vehicles like interest-only payments, teaser rates and adjustable rate mortgages can be beneficial to help get folks into housing. Each has its own good and bad points, says John S. Allison, commissioner of the Mississippi Department of Banking and Consumer Finance.
While Mississippi hasn’t yet seen a high degree of foreclosures in the subprime market, right now there has been a two-year moratorium on home foreclosures on the Mississippi Gulf Coast as a result of Katrina. Allison says he doesn’t know what will happen when that moratorium lifts in October. As far as the impact on the banking market, he says some of the traditional lenders probably have more restrictions on their lending right now.
“They are cutting back to some extent on some of these products and real estate lending in general to see what is going to be happening in the economy in the next year or so,” Allison said. “There is volatility in what is going to happen in the whole real estate market. Some of the uncertainties are what the U.S. Congress might do to drastically cut off some of these markets. We certainly don’t want that. We as a group of state regulators don’t want that. There could be a knee-jerk reaction from Congress that hasn’t been thought out totally.”
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.