CanadaNews’ Reporter Notes

Like many of you, when I first heard about the housing market problems, I kept hearing about stuff that I didn’t understand. The 2007 World of the Year, Sub-prime, was foreign to me. It was like someone speaking Russian to me, I didn’t get it.

Over the past year, some of us fee like we have become home-buying experts – at least we got an understanding of what sub-prime means. Please don’t bring your homes to me. If you do, you might be in worse shape than that of those you read about.

As I mentioned before, we learned about that word: sub-prime. We learned that a sub-prime mortgage is a high-risk real-estate loan. These loans were offered to people with pretty low credit ratings [sometimes embarrassing]. These same people didn’t have a down payment to make and sadly didn’t qualify for a conventional mortgage.

Some people thought all of that smelled fishy. Whereas others thought people were getting their part of the American Dream.

I have to be clear here, due to the higher element of risk, the borrowers/lenders charge a particular premium. This premium was usually about two or three percent more than the original rate offered to those with better credit.

It goes a little like this:

· Person A wants a home loan

· Person B has a home loan to give

· Person B’s loan has a going rate of five percent interest for a conventional loan

· Person A has a low [or poor] credit score

· Person B can offer the same loan at eight percent for a sub-prime transaction.

Something else that’s now widely known of a sub-prime loan is that there is often a really really….I guess I should say ‘really’ one more time for dramatic effect…REALLY low “teaser” rates that are offered for the first year or two. This then grows like a bad infection. ; Sort of like having an abnormally large adjustable rate.

It’s feels like a hand-to-mouth moment because these loans were based on the assumption that the American housing prices would appreciate by double-digit percentages every year. When the interest rates increased and housing prices stalled, the number of defaults soared.

It’s anyone’s guess as to how big the problem really is; but in mid 2007 it’s been estimated that in the United States there were $1.5 trillion in sub-prime mortgages outstanding. It’s a significant number because about 20 percent of all American. Mortgages fell into the sub-prime category.

Those who fell into the sub-prime situation were people with high debts via credit card or otherwise. Generally these people earned very little. Not only that, but the majority were low-income families, new immigrants, the elderly and the disabled.

Just imagine, you moved to the United States with a dream of doing better than you were from your previous station. You come here, and find out you actually ‘qualify’ to own a home – although you don’t have much money. Not only that but you don’t speak the language very well, but these lenders tell you that you still qualify. All you understand is at the end of the day, you can own a home.

These sub-primers mostly were in low-income, high-default neighbourhoods in urban centers. Some, but not all, were less likely to have a post-secondary education, and were more likely to be Hispanic or African-American. This wasn’t just a Hispanic or black problem, many whites were effected too. To many, the sub-prime situation was not race-specific.

Sub-prime mortgages offered a low-interest-rate environment with homeowners who wanted to consolidate debt or borrow to pay for home improvements. This all would wreck havoc to the housing market.

The United States government guidelines and laws didn’t develop a standard, or have appropriate regulations to monitor the U.S. mortgage market. It was like the Wild West. Or, to me, like Bloody Kansas in the mid-1800s (ask your history teachers about that).

In a low-interest-rate environment, that helped to fuel a demand for new financial products that were basically bundles of these high-yielding securities and selling them to a range of investors. This process is known as “securitization.”

Investors had a field day because they were certain that risk-management techniques would mitigate the inherent risk. They also assumed that the boom in real estate prices would continue. Why they’d think that?…I have no idea. Everything has a ceiling at some point (pssst…even the internet).

All of this led to the “credit crunch.” The market had a meltdown. Right now, I might be putting it lightly. The housing market had been burned by the exposure to the sub-prime defaults. The lenders have pulled in their horns and are being much more risk averse (as they should have been in the beginning….or at least not being so reckless at making money).

Some say the credit crunch has affected more than just the housing market. It’s affected everything from the price of gasoline to the price of food. People aren’t buying as much. They aren’t going out for social hour as much. Overall, they aren’t seen as much.

To address the problem President Bush introduced a plan that freezes interest rates on some sub-prime mortgages (those made between 2005 and July 2007, with rates that are slated to increase between 2008 and July 2010) for a period of five years. There is also re-financing options for some sub-prime mortgages [with help from the U.S. Federal Housing Administration].

The president has yet to say the country is officially in a recession. He’s referred to the problem as a slow-down. To spice-up the ‘slow-down’ the president has authorized a stimulus payment to many Americans. Single persons will get as much as $600.00 and married couples will receive up to $1200.00. Bush is hoping recipients will go out and spend spend spend.

The U.S. central bank, the Federal Reserve Board, has also moved to aggressively cut interest rates. The most recent cut was on Sunday, March 16, when the lending rate was reduced to 3.25 per cent from 3.50 per cent. At the same time, another sort-term loan facility was created to ease the pressure on investment bankers.

For those who are not sure of what they can do now, try using that money the government says you deserve and pay down your debt. Make that extra mortgage payment (if you still own your home). Or give an extra payment to what bills you owe. To put it in more realistic terms, what do you think you need most: the new plasma TV or knowing that you are one payment closer to having your life back?

I’d love to hear your remarks…so leave a comment.