Debt Free

The subprime mortgage market’s going down like an old Vegas casino. According to mortgageimplode.com, an astounding 86 major U.S. lenders have gone under since the sub-prime mortgage problems surfaced in late in 2006. Ouch!! Why have so many lenders gone the way of the dodo?

It’s on the verge of collapse for much the same reason as any other business goes away; their business model was flawed to the point where it wasn’t really viable on a long term basis. Once the assumptions that the model was founded upon changed, the whole thing collapsed like Galloping Gertie. In this case lenders were too easy with credit and weren’t asking for enough money down to ensure there was at least some equity in the property. In addition, too many of these mortgage banks had virtually nothing in reserve to tide them over in the case their default rate got a bit out of hand for a while.

Many of these mortgage lenders used up most of their working capital repurchasing bad loans from their investors. Presto! - another mortgage lender out of business. This problem is being compounded by the reluctance of the remaining lenders to give mortgages to buyers with bad credit. The result of this is a reduced pool of homebuyers. With fewer buyers homes take longer to sell and tend not to bring as much money. Ironically, a percentage of these homes are those that have been foreclosed upon by the banks that got stiffed. If they foreclose on too many properties that take an extended period to sell, their financial worries deepen.

Where does that leave you? If you’re a homeowner with bad credit, it may leave you in the rental market, due to the difficulty finding a mortgage lender willing to take your business. If, however you’re a real estate investor with an eye on the long term, you may be finding the silver lining in this cloud. According to the latest Mortgage Bankers Association report, the number of loans entering foreclosure in Q1 2007 was up 14 basis points from the previous quarter and 20 basis points from the same quarter a year ago. Furthermore, FHA loans, typically used by those in the lower end of the lending pool set a new foreclosure record last quarter.

This points to a nice opportunity for the foreclosure and pre-foreclosure investor. You’ll have a large number of properties to choose from. If you’re in position to expand your portfolio, now could be a great time. You may have a larger pool of renters to rent your properties to as well, due to the number of people renting rather than buying.