Special Report 2/19/08

Housing Market - February 19, 2008

In light of recent headlines regarding the mortgage “crisis” and slowing nature of the housing market, I wanted to share some information I have received. After reviewing this information, I hope you will feel better about our economy.

The following was produced by the Missouri Bankers Association, and with their permission, I share it with you.

Missouri Banks & Subprime Foreclosures

The cooling off of the housing market in many areas of the United States, combined with economic turbulence, has put subprime mortgage loans in the spotlight.

What are subprime mortgages?

Subprime mortgages were developed to assist borrowers with a less-than-perfect credit history. The word “subprime” refers to a borrower’s credit quality. These loans feature interest rates that are higher than overall market rates.

While many different types of lenders make mortgage loans, most subprime lending is done outside of the banking industry – often by mortgage brokers and mortgage companies that may not be subject to the same scrutiny as federally insured banks and savings institutions.

Regulated banks and savings institutions have made very few subprime loans and most local community banks have made none at all.

What created the subprime loan problem?

Most of the foreclosures we’re seeing today are the result of particularly risky loans made by loosely regulated players in the mortgage market or because of worsening economic conditions in some regions. Unregulated, non-bank mortgage lenders have played fast and loose with their underwriting standards – their guidelines for making loans – and have given the entire financial industry a black eye.

In the subprime market – which constitutes 14 percent of the total housing market – roughly 85 percent of subprime loans are being paid on time. That shows that most subprime borrowers have good loans they are capable of repaying.

The 15 percent of subprime loans that are experiencing troubles are likely to be loans with particularly risky features – such as no-documentation loans or those with extremely high loan-to-value ratios. Most federally insured banks and savings institutions do not make these kinds of loans. Rather, they have been made by mortgage brokers and mortgage companies that are not subject to the same scrutiny as federally-insured banks and savings institutions.

In spite of recent bad news about subprime lending, the majority of borrowers with subprime loans are successful in buying a home and rebuilding their credit.

Subprime mortgage loans were developed for borrowers with credit histories that disqualify them for standard mortgage loans. Subprime loans are not inherently “bad” or “predatory” – they are just less than Grade-A.

The market works best when a wide range of options are available. Subprime loans used carefully and in the right situations are a viable option for some homebuyers.

The loan portfolios at federally insured banks and savings institutions are mostly untouched by the current subprime mortgage debacle.

Federally insured banks and savings institutions are very sound today and will be able to weather this economic downturn.

94 percent of mortgage borrowers are paying their loans on time.

Every bank will do its best to help customers who are overextended due to a subprime loan obligation from another lender. Unfortunately, many of these problems – created outside the banking system by loosely regulated participants in the mortgage market – will simply be impossible to fix.

Because federally insured banks and savings institutions maintained prudent lending practices throughout the real estate boom of the past few years, they will be able to keep mortgage dollars flowing to communities large and small.

Banks are interested in long-term customer relationships, which isn’t necessarily true of non-bank mortgage lenders and brokers, some of whom might be here today, gone tomorrow.

While federally insured banks and savings institutions don’t require perfect credit for a mortgage, they aren’t going to make a loan that subjects the borrower or the bank to excessive risk.

Customers don’t need perfect credit to borrow from a bank, but a loan that’s beyond their ability to repay or that subjects the customer or the bank to undue risk isn’t in anyone’s best interest. Banks and savings institutions have maintained their prudent lending practices throughout the real estate boom of the past few years, and that means we will be able to keep mortgage dollars flowing to communities large and small.

Should subprime loans be banned?

No. There are less-than-Grade-A borrowers who can still qualify for a loan they can afford. These individuals should not be deprived of the chance to buy a home. The better solution is to rein in the practices of unregulated mortgage lenders.

Our economy thrives when a wide range of options are available. We want to be as flexible as possible in meeting the credit needs of our customers.

Thank you.

Ron and Rep. Brian Yates - R consider pending legislation.

Ron discusses HB 327 with Rep. Michael Spreng – D (left), Rep. Fred Kratky – D. All are members of the Special Committee on Job Creation and Economic Development, of which Ron is the chair.