American real estate crisis: real estate lending – the wobbly house of cards

Subprime mortgages contributed significantly to the recent billions in losses by banks. But under the surface already another problem brewing: the business with second secured real estate loans.

Encouraged by the rise in house prices borrowers have increasingly tapped tied up in their homes capital in order to finance a new car, for example, a renovation or even a deposit. In this way, the lending of property assets formed the foundation of the American consumer strength. However, given the housing market crisis and steadily falling home prices, the problems of this lending are programmed. End of September, loans and credit lines totaling at least 14.7 billion US dollars had already overdue – the highest level in a decade. “After subprime mortgage loans this second secured real estate loans are currently the biggest problem the industry,” says analyst Frederick Cannon from the investment firm Keefe, Bruyette & Woods.

In addition, little can be done to avert the negative effects of a worsening of this 850 million US dollars heavy market. The creditor of a mortgage loan has a first priority claim to the underlying property. In case of a foreclosure, it can sell the property to satisfy his demands for money. If the proceeds achieved in this way but this is insufficient to cover the outstanding balance sum of the creditor, a bank gets nothing with subordinated collateralized real estate loans. “Must be the lender of mortgage loans face the music,” said Amy Crews Cutts, deputy chief economist of the Mortgage financier Freddie Mac.

Of these, JPMorgan Chase, be affected Washington Mutual, IndyMac, Countrywide Financial and other financiers. On January 16, JPMorgan reported that had (against only 125 million US dollars for subprime mortgages) are made in the last quarter of additional depreciation of problematic mortgage products in the amount of 395 million dollars. Washington Mutual announced in the last quarter, that its holdings of defaulted mortgage loans and credit lines since the end of 2006 has increased by 130 percent and led to losses of 976 million dollars. Even conservative lenders, which have so far been largely spared from the worst of the subprime crisis, now in trouble. For example, Wells Fargo had in connection with real estate loans recently provisions totaling $ 1.4 billion form.

Until recently, this form of lending was mainly in the allocation of credit lines. They allowed borrowers to convert their real estate assets into cash to pay off credit card debt, for example. But as the boom continued, rising house prices to new heights, banks began to offer second secured or “piggyback” loans (loans that are taken in addition to a first mortgage, usually to the buyer the payment of the deposit ease). This practice enabled mainly-prime buyers to acquire even larger houses they could never afford. Traditional lending standards were thrown overboard and so borrowing the buyer exceeded noticeably the value of their homes. According to the trade publication “Inside Mortgage Finance” as a result, the share of this segment increased in the total mortgage market to 14.4 percent.

The boom meant that homeowners took advantage of the system for their own ends and step by step, all in their homes silvered capital employed – a situation that has been partly facilitated by banks do not be investigating whether borrowers shots sequence loan from competitors- Loans-n-Loans. Another malicious practice has been in addition to a provided with payment options adjustable rate mortgage in the award of subordinated real estate loans. This type of mortgage allows borrowers among other things, to pay a lesser amount than the usual monthly interest payments. The missing payments are added to the outstanding loan amount, which consumes increase gradually the real estate assets. This creates a risky property loan in addition to the already risky mortgage.