Worry Over Subprime Home Loans

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Buyers who were given loans even though they have weak credit are missing their payments. Now investors and lawmakers are taking notice. Transcript of radio broadcast:
15 March 2007
This is the VOA Special English Economics Report.

Financial markets had a rough week again as investors grew more concerned about the United States housing market. Much of the concern is about home loans to people with poor credit or little history of borrowing money.

Most homebuyers are considered "prime," or a high-quality credit risk. Yet lenders have taken the risk of subprime loans because those buyers pay higher interest rates.

The number and complexity of nontraditional home loans grew along with the housing market. Now, that market has cooled. At the same time, many buyers, and not just in the subprime market, are seeing their monthly payments go up. Nontraditional loans often start with low payments for the first year or two.

The Mortgage Bankers Association reported this week on the condition of eighty percent of home loans nationally. It says five percent of all mortgage payments were at least thirty days late in the final three months of last year. But more than thirteen percent of all subprime loans had late payments -- the highest level in four years.

By the end of last year, fourteen percent of all home loans were subprime. Total mortgage debt in the United States was ten trillion dollars.

Some experts worry that the problems could affect the wider economy. Congress may act to control risky lending. And Senate Banking Committee Chairman Christopher Dodd says federal aid may be needed to protect buyers.

If a buyer misses too many payments, a lender may try to reclaim the house through a forced sale. Nationally, foreclosure rates increased in the fourth quarter, but especially among subprime loans.

A number of lenders have already failed or left the business. Yet some may be able to escape losses by passing their risk to others. Many lenders sell their mortgages to investment banks. The banks resell the loans, creating trillions of dollars in mortgage-backed securities. These are bought and sold on financial markets. But some of these investments can be very risky if homeowners cannot repay their loans.

Subprime loans are only part of the story, however. House prices have been slower to rise, and in some places have dropped. Housing expert James Diffley of Global Insights says prices for existing homes in California could drop sixteen percent this year. He says other states including Arizona, Hawaii, Florida and Massachusetts could have large declines as well.

And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Steve Ember.