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Mid-level Loans Also Becoming More Delinquent By Groshan Fabiola In the mortgage industry, are issued to people according to their credit score, income and a few other financial factors. The most influential piece of information that lenders need to determine what type of loan and at what rate they will give to a borrower is their credit score.
Without a good credit score, a consumer will either not be approved for a loan all together or will get a loan with much more unfavorable terms and interest rates. Normally, borrowers are divided into three categories based on their credit score; there is the subprime group (those with the worst credit), the Alt-A group (those with medium level credit scores and the A-paper or prime group which consists of the borrowers with the best credit scores.
The mortgage industry has gained a lot of negative attention lately as we have seen more and more of the given to subprime borrowers go delinquent or even worse, end up on foreclosure. Now, as if things couldn’t get any worse, the people in the mid-range group are also gaining attention for their inability to pay their mortgage payments each month.
So who’s fault is all of this? The borrowers? The lenders who got people into that they really couldn’t afford?
Or the housing market itself? Although we may never know the answer to these questions, it is important to try and correct this problem before it spread even more than it already has. “The mortgage market has been roiled by a sharp increase in bad made to borrowers with weak credit. Now there are signs that the pain is spreading upward. At issue are mortgages made to people who fall in the gray area between ‘prime’ (borrowers considered the best credit risks) and ‘subprime’ (borrowers considered the greatest credit risks).” “A record $400 billion of these midlevel -- which are known in the industry as ‘Alt-A’ mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A accounted for roughly 16% of mortgage originations last year and subprime an additional 24%.”
Obviously, these take up a big portion of the mortgage
industry as a whole, so if a big portion of the go into default, we could be seeing a lot of trouble. Also fueling this issue were many of these Alt-A were brand new to the industry and required little to no documentation of income or assets. “The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.”
It seems as though many of these mid-level borrowers got into homes they really couldn’t afford, and now as the market begins to slow, they are stuck against a wall. They can’t sell or refinance to get rid of any other debt, and their payments soon become too much for them. It seems as if lenders will have to tighten their standards in the future, and borrowers will have to do everything they can to keep on track with their payments.
