Mortgage Loan: The Equity Equation Flips
So far the going has been good for those with poor credit to try and own a house. In the sub-prime market not many questions had been asked and loans had been easy. But with the foreclosure raging through the country mortgage lenders have been tightening their belts making it difficult for house loans to be availed of. It is inevitable that such a situation would arise because after a grace period of two years or so monthly payments more than doubled. Borrowers just could not pay as flexible interest rates arbitrarily increased. The property slipped into foreclosure. Borrowers and lenders are now blaming each other.
It was a profitable venture for lenders. Since the credit history of the borrowers was poor they were charged high interest rates for being granted the favour of a loan. But the operation turned sour when with the spiraling of default numbers the very base of the exercise became shaky. Flow of money coming into the kitty came to a standstill. The fact that there was very little equity left in the units the borrowers could easily walk off without a backward glance. The property was not worth much to cry over and in any case their credit was bad. There was nothing new to lose!
Overnight shutters began to be pulled down on sub-prime divisions. Only a few limped along. Some filed for bankruptcy while others pruned the number of staff. Among the prominent ones who filed for the protection of bankruptcy laws in April are New Century Mortgage Corporation and its auxiliary Home 123 Mortgage Corporation The waves touched each corner and pocket of the country. The nation’s largest lender, Countrywide Financial Corporation, had borrowed $11.5 billion from 40 banks. The crisis had pushed its smaller cousins into insolvency.
Those lenders who had diversified income avenues and who have mixed and matched sub-prime with conventional prime loans will be able to surface from this catastrophe. There is little or no hope for those who had put all their eggs in the one sub-prime basket. They do not have a spare one to clutch on to.
It is estimated that 325,000 units are already in the foreclosure net. The quarterly rate during the previous two years was 230,000. It is this point from which the entire credit market is being infected says prominent economist Covarrubias from the University of Texas.
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