Will Subprime Lending Practices Crash the Real Estate Market ?

We can't avoid the negative news about the subprime lending market.

There are several issues here. They all seem to center around the fact that loans were made that should not have been.

First we need to look at the definition of a subprime loan. From HUD, we read "Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk." Not only are the loans at higher rates but they usually have higher fee and costs.

Yesterday, an article in the Boston Globe , looks at the potential impact that this lending market may have on the housing industry in the near term. Quoting former Federal Reserve chairman Alan Greenspan as having 'predicted the subprime shakeout will worsen. He said subprime mortgage defaults would spread to other parts of the economy, especially if home prices decline. "'If prices go down, we will have problems -- problems in the sense of spillover to other areas," Greenspan said at a Futures Industry Association meeting in Boca Raton, Fla. on Thursday.'

Well, it looks like sub prime lending has become the topic of the week. The March 26th issue of Business Week has three article that reference the subject. I picked up today's Sunday Globe, (March 18) and there it is again.

Although only a small fraction of the all the loans made, why are they achieving this notoriety? Well, there are several considerations. First, it appears that the default rate on this loans is disproportionatly high. Second, some recognizable names from the financial and investment world are being mentioned. Third, we read that some of the people caught up in this claim that they were not fully made aware of the perils of these loans, and that others were placed in the subprime loans even though there qualifications did not require these programs.

With all of the stories in print and online, no one has yet come out and said "predatory lending"

The general consensus seems to be that although there will be many people hurt by all of this, and there will be a negative to both the residential real estate market. This will not result in a crash in either.

If there is to be any good to come out of this, it will have to be regulations that require better disclosure, and perhaps place limitations on some of the loan products. As several of today's commentators have said, "the American dream has become the American nightmare".