The mindset of many may be that anyone with a subprime loan has either failed, foreclosed, or is at least doomed to. However, recent data released by Inside B&C Lending just might change those perceptions.

According to the data, “A lack of new originations combined with record-high foreclosures” has served to reduce the number of existing subprime loans in the U.S. by nearly half. As of the end of 2006 — the last year in which subprime loans were generally written –subprime volume stood at $1.24 trillion, according to Inside B&C Lending. That dollar amount has fallen by $155 billion over the last year alone, dropping the total of outstanding subprime loans to an estimated $700 billion (as of June 30, 2009).

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According to a recent article in National Mortgage News, two separate studies revealed that subprime mortgages failed to accomplish the main goal of their design — putting people into homes. The studies revealed that the “temporary nature of these loans” combined with the lack of “soft information” collected by lenders, contributed to subprime’s short life expectancy.

Yuliya S. Demyanyk, a Senior Research Economist for the Federal Reserve Bank (FRB) of Cleveland, published a paper for the FRB of St. Louis which found that between the years 2001 and 2006, nearly 80% of subprime loans exited the marketplace within three years. Demyanyk’s research found that the high “exit rate,” even when it was into more prime or “more stable subprime” loans, reveals the temporary nature of these loans. Less-qualified borrowers tended to use their subprime loans more as “bridge loans”, a kind of temporary financing. The fact that subprime loans carry such high interest rates, fees, and prepayment penalties motivated most to refinance out of their costly loan as soon as possible.

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We’ve learned entirely too much over the last few years or so not to be able to recognize the writing on the wall. As taxpayers, we’ve endured far too many bailouts to not get the sense that another one may be lurking just around the corner. That’s why it should come as no big surprise that our third story of the week featuring the escalating mortgage defaults at the Federal Housing Administration involves the discussion of yet another taxpayer bailout.

On Tuesday we blogged about the rise in “zero pay” defaults on FHA-insured loans. Yesterday we updated the story about how the government was sending “SWAT teams” unannounced to problem (FHA) lenders. Finally, on page three of this morning’s Wall Street Journal comes an article titled “FHA Losses Spur Talk Of a Taxpayer Bailout.”

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GMAC, the financing arm of General Motors, announced today that they will resume auto financing to subprime borrowers. The move seems like a last ditch effort to improve years of dismal sales, and escape the federal government’s 60-day ultimatum without filing for bankruptcy.

Despite the dark clouds that lay ahead, GMAC feels confident that easing their lending restrictions will be able to free up significant financing that can light a spark under sales: Read the rest of this entry »

We postulated not long ago in this blog that the subprime mortgage markets — one of the causes of the mortgage market meltdown — will re-emerge. What we don’t know is when that will actually occur, but we remain convinced that it will.

There are a number of factors which support the return of the subprime market.

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Subprime borrowers will eventually return to the marketplace as a demographic of great interest to lenders. Looking back on the trends of years past, it’s nearly impossible to predict when, but it’s certainly plausible to predict why such a statement may be true.

Looking back to the causes and effects of the surge in subprime borrowers when the refi boom dried up in 2004, it certainly stands to reason that due to current economic conditions and credit restrictions, a newly developed and under-served audience of “below prime” borrowers will emerge — and lenders will take notice.

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It all boils down to one simple problem: low-income borrowers, and borrowers with poor credit, applied for and were issued loans they could not afford. How did this happen?

Starting in 1992, Congress demanded that Fannie Mae and Freddie Mac increase the amount of mortgages they buy which were made available to low-and moderate-income borrowers. By 2000, HUD, Fannie and Freddie’s regulator at that time, had required that the two dedicate 50% of their loan portfolio to accommodate low and moderate income borrowers. In order to reach that goal, lenders were forced to relax their lending standards. “You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006,” said Steven Schwarzman, the chairman of Blackstone Group. According to Wayne Barrett of the Village Voice, in 2003 alone, Fannie and Freddie spent $81 billion on subprime mortgages.

-Subprime loans were bundled into securities, given better ratings by rating agencies, and sold to investors around the world.

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