Understanding the U.S. Subprime Mortgage
World financial markets in recent weeks by the subprime mortgage bubble. What exactly is the subprime mortgage crisis? And how for RI do not bandwagon hit the crisis? Following analysis by Sid H. Kusuma, who is now joining the SMF, and specifically explore the residential mortgage market in the field of securitization, IT, services and risk management consultant. She has also joined Citigroup Inc. and Bear Stearns in the U.S. and PT Ernst & Young Indonesia. The phenomenon of Subprime Mortgage market meltdown that occurred since mid-2006 had an impact of negative sentiment in the capital markets, including Indonesia. To be able to understand what happened, it is necessary to understand whether the subprime mortgage loan and its characteristics. Understanding Subprime Mortgage Loan Subprime mortgage loans in the United States granted to creditworthiness of consumers who have less than adequate. One way to measure consumers’ creditworthiness be done by seeing credit score.
Mortgage delivery system in America is very dependent on credit score issued by companies that use credit scoring methods such as FICO. For information, consumers have a FICO score buffer starting from 300 s / d 850 depending on the results of calculations performed by service providers ceridt score by looking at five main categories as below: 1. Payment history (35%) 2. Amounts owed (30%) 3. Length of credit history (15% 0 4. New credit (10%) 5. Types of Credit Used (10%). Although changes periodically, the current average credit score for consumers in the U.S. ranges from 620. The lower the credit score (FICO <620), the less the feasibility of these consumers to get mortgages. Subprime mortgage borrower be given to consumers who have a FICO score <620. In addition to credit scores, subprime mortgage loan can also be seen from several things: 1. The high ratio Loan-to Value up to 100% 2. Collateral mortgages that do not meet the fundamental calculation of the value. 3. The lack of accessories mortgage documentation (low-doc) or no verification of income (stated income), source of downpayment and work history. 4. The high-Debt to-Income (DTI) and Payment to income (PTI) The above characteristics are directly increase the risk of mortgage dealer. From one side, heightened risk offset by high interest rates and other special features. On the other hand, high interest rates cause consumers’ inability to get a mortgage.
In this case, the dealer mortgage fixed mortgage products to offset higher risks but can be accessed by consumers, at least for Facebook to dioriginasi. Product subprime mortgage loans that is known is 2 / 28 ARMS. type of mortgage is sufficiently developed which covers almost 75% of subprime adjustable mortgage loans dioriginasi. This product features the first two-year fixed rate that is Teaser Rate and will change at the end of the second year becomes an adjustable rate and each subsequent year. The problem is channeling mortgage in mortgage mengoriginasi measure the ability of consumers to pay using a low Teaser Rate. At the time mortgage rates unchanged at the end of the second year into adjustable rate, monthly payments could rise dramatically consumers because the margin for consumers with high-risk profile to achieve the 300-500 basis points. This is causing consumers who are less creditworthy having trouble paying the mortgage home loan, and then failed to pay. In addition, there was Predatory Lending practices committed by rogue mortgage dealer. Segments above fool consumers with a variety of tactics such as deliberately giving a high number of loans with high interest rates to the consumers who obviously not able to pay.
Expected to improve if there was failure to pay the mortgage dealer shall execute and benefit from the sale of mortgage his house. What happened to the Subprime mortgage loans in America? Growth in the U.S. subprime mortgage market increase rapidly reaching 22% of total mortgage originations in the amount of total outstanding borrowing more than $ 650 million at year end 2006 (see graph). Some of the major factors increasing the market. From the demand side, the housing sector is well over the years from 2002 to 2005, low mortgage rates and appreciation in house prices. From the supply side, with high demand and still business opportunities, distributors berbodong mortgage-masse into these markets to offer his services .. With increasing competition, suppliers compete to get a home loan customers by offering quite a variety of mortgage products without knowing in depth the risk characteristics as well as her relaxkan provisions of mortgage origination. This resulted in a lot of features with high-risk mortgages approved for consumers who do not deserve. With the declining housing sector growth since the beginning of 2006, which was marked by the decline in house price increases and rising mortgage rates, many mortgage consumers in this market which experiencing difficulty paying the installments and later determined to have failed to pay. Results of a survey released by the Mortgage Bankers Association (MBA) said that the delinquency rate for subprime mortgage loans for Q4-2006 was 13.33%.
For comparison, deliequency rate for prime mortgage loans ranged 2.57%. Meanwhile, Foreclosure rate is 2% compared to 0.24% for subprime and prime mortgage loans as of Q4-2006. And Foreclosure ratea inventory is 0.5% and 5.1% for subprime and prime mortgage loans as of Q4-2006 Market Lessons for residential mortgage loans in Indonesia has a variety of risk characteristics and can be mitigated with the pattern of origination to servicing the well. In some countries including the United States, standardization of mortgage documents is one way for the creation of standardization and reduce risk. Benefits from This standardization of delinquency as evidenced by the difference between conforming & Foreclosure rate (prime) mortgage loans and subprime. In Indonesia, the standardization of mortgage documents have been created to be used by distributors mortgage. Standardization of mortgage document which covers 5 topics Origination, Underwriting, Quality Control, Servicing & MIS. Some examples of major things in standardization such as how to calculate the LTV is right and its largest boundary, the type of documentation that must exist and verification process should be done before the mortgage can be approved, PTI & DTI. The process of underwriting in which the interviews with consumers to get a feeling about dikonsumen is important. In addition, providing education to prospective customers so we know the mortgage process and the rights and obligations is needed. Consumers who are educated can help to prevent the distribution of housing loan scheme terkibuli by an unhealthy and detrimental to consumers.
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