Lenders sour on sub-prime market
Lenders sour on sub-prime market
Gone are the days when a new immigrant could get easy credit to buy a home
By Bhagyashree Garekar, US Correspondent
WASHINGTON - WHEN Ms Genevieve Florendo decided to buy a house this year, she had no idea it could be done in a snap.
It turned out that she could. As recently as this year, lenders were still giddily offering mortgages to sub-prime buyers like Ms Florendo, although the sector's fallout has tightened the faucets.
Ms Florendo, 32, who arrived from the Philippines to work in the United States as a nurse less than five years ago, had always assumed she would need to pay a sizeable down payment to own a home. As a new immigrant, she was almost sure she could not afford it.
A friend referred her to a realtor and a lender who assessed her creditworthiness, her income and bank balance. And before a month had passed, she was the proud owner of a US$275,000 (S$423,000) townhouse in Glen Burnie, Maryland.
'All I paid was US$7,000 towards the closing fee, the expenses towards securing the title and other formalities.'
She felt lucky, she added. 'Some of my friends are buying houses now, and they are getting loans at 7 per cent to 7.5 per cent. Just a few months ago, when I signed the deal, the rates were lower. I pay a fixed rate of 6.65 per cent.'
Ms Florendo is what is called a sub-prime borrower - the term used for a borrower who does not qualify for the lowest rates at which banks extend loans.
Usually, sub-prime rates are applied because the borrower has a patchy credit history and so is charged more for the greater risk he represents to the lender. Or the borrower may simply lack the extensive credit and employment histories that get the best rates and terms.
Was she nervous, given the unsavoury sub-prime label?
'Well, I got my accountant brother in Singapore to vet the terms and conditions in the loan contract, and I felt more confident after that,' she said.
By some estimates, sub-prime lending has accounted for as much as half of the past decade's rise in the US home ownership rate from 65 per cent to 69 per cent.
The rates for a sub-prime loan can go as high as 10 per cent, said Mr Kenny Sylvestor, who is with a mortgage company based in Rockville, Maryland.
Lately, sub-prime borrowers have spelled bad news for investors as the housing market slumped and loan defaults soared. That has left a sour taste in the mouths of investors in the US and as far away as Germany and Japan.
Chances are bright that Ms Florendo, with her steady income of US$7,000 a month and a spouse who works part-time, will turn out to be among the four out of five sub-prime borrowers who do not default on payments.
On the other hand, among the sub-prime borrowers are also fraudsters who meant to make the most of deals that required no upfront payments or even documentation; and the ignorant and the poorly educated who became victims of unscrupulous loan sharks with little grasp of the payments involved. Hundreds of thousands of them have lost their homes.
In some cases, borrowers could opt for variable-rate loans that offered low starter rates for the first two years and then adjusted for the remaining 28 years to a rate that was often three percentage points higher than what a prime customer normally paid.
Also in the sub-prime category are people buying vacation homes or investment properties.
At first, delinquencies were low. But that was mainly because home prices were rising so much that borrowers who fell behind could easily refinance their loans.
Over the last six months, and dramatically in the last three months, lending re-
gulations have been tightened and it is difficult to take out a loan without putting up a 20 per cent down payment.
'It is not easy any more,' said Mr Sylvestor, who has been a mortgage broker for 12 years. About 10 per cent of his clients are sub-prime, he said.
Gone are the days when a new immigrant could get easy credit to buy a home
By Bhagyashree Garekar, US Correspondent
WASHINGTON - WHEN Ms Genevieve Florendo decided to buy a house this year, she had no idea it could be done in a snap.
It turned out that she could. As recently as this year, lenders were still giddily offering mortgages to sub-prime buyers like Ms Florendo, although the sector's fallout has tightened the faucets.
Ms Florendo, 32, who arrived from the Philippines to work in the United States as a nurse less than five years ago, had always assumed she would need to pay a sizeable down payment to own a home. As a new immigrant, she was almost sure she could not afford it.
A friend referred her to a realtor and a lender who assessed her creditworthiness, her income and bank balance. And before a month had passed, she was the proud owner of a US$275,000 (S$423,000) townhouse in Glen Burnie, Maryland.
'All I paid was US$7,000 towards the closing fee, the expenses towards securing the title and other formalities.'
She felt lucky, she added. 'Some of my friends are buying houses now, and they are getting loans at 7 per cent to 7.5 per cent. Just a few months ago, when I signed the deal, the rates were lower. I pay a fixed rate of 6.65 per cent.'
Ms Florendo is what is called a sub-prime borrower - the term used for a borrower who does not qualify for the lowest rates at which banks extend loans.
Usually, sub-prime rates are applied because the borrower has a patchy credit history and so is charged more for the greater risk he represents to the lender. Or the borrower may simply lack the extensive credit and employment histories that get the best rates and terms.
Was she nervous, given the unsavoury sub-prime label?
'Well, I got my accountant brother in Singapore to vet the terms and conditions in the loan contract, and I felt more confident after that,' she said.
By some estimates, sub-prime lending has accounted for as much as half of the past decade's rise in the US home ownership rate from 65 per cent to 69 per cent.
The rates for a sub-prime loan can go as high as 10 per cent, said Mr Kenny Sylvestor, who is with a mortgage company based in Rockville, Maryland.
Lately, sub-prime borrowers have spelled bad news for investors as the housing market slumped and loan defaults soared. That has left a sour taste in the mouths of investors in the US and as far away as Germany and Japan.
Chances are bright that Ms Florendo, with her steady income of US$7,000 a month and a spouse who works part-time, will turn out to be among the four out of five sub-prime borrowers who do not default on payments.
On the other hand, among the sub-prime borrowers are also fraudsters who meant to make the most of deals that required no upfront payments or even documentation; and the ignorant and the poorly educated who became victims of unscrupulous loan sharks with little grasp of the payments involved. Hundreds of thousands of them have lost their homes.
In some cases, borrowers could opt for variable-rate loans that offered low starter rates for the first two years and then adjusted for the remaining 28 years to a rate that was often three percentage points higher than what a prime customer normally paid.
Also in the sub-prime category are people buying vacation homes or investment properties.
At first, delinquencies were low. But that was mainly because home prices were rising so much that borrowers who fell behind could easily refinance their loans.
Over the last six months, and dramatically in the last three months, lending re-
gulations have been tightened and it is difficult to take out a loan without putting up a 20 per cent down payment.
'It is not easy any more,' said Mr Sylvestor, who has been a mortgage broker for 12 years. About 10 per cent of his clients are sub-prime, he said.
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