Why the Number of Bad Credit Mortgages has Increased

The number of people with bad credit histories (also known as adverse credit histories) has increased significantly in recent years. This is due to several factors.

1. Increased choice of financial products available for sale.
There are numerous products and opportunities for borrowing money. With increased choice of borrowing options, it is not surprising that more people have missed the odd payment.

2. Increased propensity to borrow.

The last decade has seen record levels of consumer borrowing. The level of consumer borrowing has risen for various reasons, some cultural and some financial.

• Lower interest rates.- A period of low inflation and low interest rates has made borrowing seem more secure than in previous decades.
• Rising House Prices. - Rising consumer wealth has given consumers more confidence to borrow more money and take out other loans backed against the value of their house.
• Increased willingness to go into debt. Generally, consumers have become more willing to borrow and go into debt. This reflects changing attitudes to money and spending.
• Long Period of economic stability. Since the end of the last recession in 1992, the economy has experienced a long period of unbroken economic expansion. This has encouraged people to borrow and therefore the number of people with people who borrow has increased.

• Tips on Getting Bad Credit Mortgage and Adverse Credit Remortgage

Related

• Why Sub Prime Crisis Happened
• Adverse Credit Mortgages
  

sub-prime definition

There has been a lot of talk recently of the sub-prime crisis. However, many are uncertain of what we actually mean by 'sub-prime'.

Sub prime is more common in the US. In the UK, we are more likely to talk about the adverse credit or bad credit mortgage sector. However, the recent interest in the sub-prime crisis has made the word more commonly used in the UK>

The sub-prime sector refers to those borrowers who have a history of bad credit. This may range from a simple late payment, to several defaults and even bankruptcy.

This sector is seen as more risky because people with poor credit histories are more likely to default in the future. Because of this banks and lending institutions can charge a higher interest rate as a premium for the increased risk.

Therefore, the sub prime sector was often one of the most profitable. However, the sub-prime sectors is often the most affected by rising interest rates. People on low income and poor credit are more likely to be hit by rising interest rates. Therefore, this sector is often more volatile.

• Why the Sub Prime crisis occured

Credit Crunch and Sub Prime Mortgages

I would be interested in reading your thoughts on the following post. Basically she says the credit crunch is not really a subprime problem but an ARM problem. What do you think?

- link to article: All business.com

It is certainly the case that the problems in the US Housing Market are partly due to ARM (Adjustable Rate Mortgages). In particular, many banks were lending at low introductory rates and then increasing the rate after the initial period. This problem was then exacerbated by rises in the Fed rate. It is quite interesting that the statistics suggest a low % of sub prime mortgages are ARM.

In this blog entry, I gave an example of a Teaser Mortgage, which was sold to someone who just couldn't afford it.

This is an extreme example of bad lending practise, that seems to have become more prevalent in the past 7 years.

In the cases like this we have to put a large portion of the blame on mortgage lenders who have encouraged / allowed their salesman to sell loans without the proper checks. From what I know, this kind of irresponsible lending has not been confined to the sub prime sector.

Although, perhaps the sub prime lending has been more prone to other bad lending practices.

The main contribution of sub prime mortgages to the credit crunch is that they have affected market sentiment, quite significantly.

Sub Prime Mortgage companies experienced problems because:

• Rising interest rates set by Fed
• People took out loans which were unsuitable, too high for their income.
• House price growth slowed, then fell

When mortgage defaults increased and sub-prime mortgage dealers went out of business, this had a knock on effect to other related financial groups.

Sub prime mortgage debt was often passed onto other financial institutions. As a consequence they have had to write off a lot of debt. This means generally the mortgage industry is much less keen to lend. - At least, it is making people think of responsible lending.

- In the UK, the problem isn't quite as severe because mortgage lending, even in the sub-prime sector, was generally more stringent.

Related

• What can we learn from sub prime mortgage collapse?
• Why house prices fell in on the US Housing Market

Sub Prime Mortgages in the UK

The definition of sub prime mortgages is open to interpretation. However, sub prime means that the borrower has at least some degree of bad credit history. Sub prime mortgages are also known as adverse credit mortgages.

The quantity of sub prime mortgages has been increasing in the UK. This includes people who have near prime mortgages. This is a term used for those who have minor credit blemishes; For example missing one or two debt payments. The market for sub prime mortgages has been incresing in recent years. Figures from HBOS suggest the market will hit £29 billion in 2008, from £10 billion in 2004. Increasingly main stream lenders such as Alliance & Leicester and Northern Rock are offering adverse credit mortgages, through third party lenders who specialise in the sub prime market.

Another reason for the increase in the sub prime market is the increasing number of people who have an adverse credit report. Banks are realising that the sub prime market is not necessarily a danger; especially if the borrowers have high income and only one or two missed payments.

However, there are concerns that rising interest rates will cause increased problems in the sub prime market. Sub prime mortgages are more liable to default and repossession. There are fears that what happened in the US could happen in the UK.

• Dangers of Sub Prime Mortgages
• Collapse of US housing Market
• The Value of the UK Sub prime Market - the Times
  

Dangers of Sub Prime mortgages

In the past week headlines about the US mortgage industry have dominated the news. In particular the number of defaults on mortgage payments is growing very rapidly. These defaults are concentrated on the sub prime sector. These mortgages are aimed at those with bad credit or non-status. Often these mortgages are approved without making any checks about the income status of the borrower. In the UK there has been a similar increase in the number of self-certification mortgages and other non-conventional mortgages.

The growth in sub prime mortgages has been very significant. In the US it has allowed over 6 million people to be able to buy a house for the first time. However the success of the sub prime market was mostly dependent on rising house prices. Rising house prices enabled borrowers to remortgage (refinance); this means that after a couple of years they were able to switch their mortgage and get a better deal. Rising house prices were particularly important for people who were getting 100% mortgages. This is a mortgage with no deposit. Because of the risk traditionally these 100% mortgages lead to higher interest payments. However if house prices rise it means the mortgage becomes a smaller % of the value of the house.

Unfortunately the situation is that US house prices are now falling. This means that homeowners are unable to remortgage and in many cases are left with negative equity. (house worth less than the mortgage debt)

Dangers of “Teaser” Mortgage Terms.

Another feature of sub prime mortgages is that often there was a special introductory rate to make mortgages more attractive. For example in the first year or two the interest rate on the mortgage was much lower than subsequently, this had the effect of encouraging borrowers to take on a mortgage that becomes increasingly difficult to pay back. Therefore as more sub prime mortgages reach the end of their introductory period the number of defaults is likely to grow.

The Guardian (16^th March 2007) report the story of Simeon Ferguson an 85 year old father with dementia. Unwittingly he took on a new mortgage with a fixed rate for 30 years. The introductory teaser rate offered him a monthly payment of $1,482, however after 3 years this jumps to $4,200. It is only at this point that the mortgage involves capital repayment. However the pension of Simeon Ferguson is only $1,100 a month. This is an extreme example of how US mortgage companies have been willing to ignore the most basic of credit checks in order to be able to sell as many mortgages as possible.

from Guardian

• See also More defaults on US mortgages
• Non Status Mortgages
• Shakedown - sub prime jitters in US at Economist