The Subprime Lending Crisis Hits Home For Auctioneers and Real Estate Investors

April 8th, 2007 by PA - Bloger

The controversy swirling around subprime mortgage lending has grown so intense in recent months that it has escaped the confines of the real estate industry, attracting widespread media attention and prompting a congressional investigation.

Those who support subprime lending argue that this practice makes the dream of homeownership possible for the credit-challenged buyers who comprise a growing percentage of the American population, while also boosting the national economy in the process. Opponents of subprime lending believe that these practices exploit the poor and other marginalized groups, also arguing that the economic gains fueled by subprime mortgages may prove to be short-lived and illusory.

Recent regulatory changes in the once strictly-controlled mortgage lending industry have given rise to an array of questionable lending practices, according to industry analysts. Most alarming is the increasingly common practice of approving credit-challenged buyers for interest-only loans without considering the buyer’s ability to cover the full interest and principal payment that will apply after the introductory period.

At the current juncture, it is estimated that as many as 12-15% of all subprime mortgages that have been granted in the last two years have already entered the foreclosure process. According the Center for Responsible Lending, an industry watchdog group, the foreclosure rate for subprime mortgages could skyrocket to nearly 20% by the end of 2007.

No matter which side of the subprime lending debate you agree with, one thing is irrefutable — the current crisis in the mortgage lending industry is likely to result in a flood of foreclosed properties that will be heading to auction in the near future. In some major metropolitan areas, it is now common to see 3,000-4,000 foreclosed properties hit the auction block each month, a significant increase from the per-month averages seen even a year ago.

If there’s a silver lining to be found in all of this, it may be that the increasing rate of auctions could offer unparalleled opportunities for investors adhering to the age-old formula of “buy low, sell high.” The sheer variety in the stock of properties now available in many areas of the United States will likely benefit investors who focus on this niche market.  Auctioneers will also be afforded an increasing amount of opportunties to assist the lending industry in the disposition of assets in the accelerated format.  Where in the past, lenders depended on a very tight network of brokers to sell the assets, now they will need to move these properties at a much quicker pace. Lenders have found that real estate auctions are the most efficient method of doing this and are using this option more and more.

Also, although the current situation looks grim for subprime lenders, most experts expect that the long-term damage to the housing market and the larger economy will be minimal. In a recent interview, Roger Cole,  director of the Fed’s banking supervision and regulation division, reported that little or no “spillover effects” related to the imploding subprime lending market had yet been observed. Indeed, many industry observers contend that a return to more stringent lending practices will probably prove to be a net benefit for the housing market’s long-term earnings and stability.


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