Subprime Loans Displaced In New Mortgage Market

by Peter G. Miller
August 12th, 2008

I was reading a release from Lenders One Mortgage Cooperative, a self-described “national alliance of mortgage bankers.” According to the group they closed mortgages worth $3.4 billion in a 30-day period.

What was interesting to me was the composition of the loans they originated:

“More than 50 percent of the loans originated and closed during the 30-day challenge were conventional loans. However, FHA loans contributed to 42.5 percent of the total loan volume, fulfilling nearly half of the remaining production volume. The remaining 5.3 percent of loans were jumbo, Alt-A or second mortgage products.”

This is about as good an example as you can find of the evolving mortgage market. No subprime loans. More than 90 percent of the originations are conventional or FHA mortgage products. There are huge increases in FHA loan placements and the use of conventional mortgages.

It’s just a guess but I would bet that many lenders have similar stats — and that if they do not have parallel originations today they will have something similar very soon.

The Lenders One numbers strike me as about right. Nineteen out of 20 borrowers typically financed with full docs and with the most-boring — and the most secure — loans available, loans without prepayment penalties, interest-only start periods or option ARM financing.

No doubt some folks will moan and scream about the lack of choice here, but so what. Toxic loans are out. Exploding ARMs are finished. Option ARMs are going if not gone. The result: Foreclosure numbers down the road will fall.

As to subprime loans, they’re being replaced with FHA financing. That’s much better for borrowers because it means safe and stable FHA mortgages are in hand.

Some borrowers, of course, will not be able to get financing under the new market conditions and some will only be able to get smaller loans. That will be tough for some people, but ultimately they will be better served with little or no financing rather than “affordability” products that are at the heart of our current mortgage meltdown as well as our rising foreclosure count.

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