Understanding the U.S. Subprime Mortgage

Understanding the U.S. Subprime Mortgage
The world's financial markets in recent weeks bubbling by the subprime mortgage crisis. What is subprime mortgage? And how to RI bandwagon not get this crisis? The following analysis by Sid H. Kusuma, who now joined the SMF and special residential mortgage market deepens in the field of securitization, IT, services and risk management consultant. He also has joined with Citigroup Inc. & Bear Stearns in the U.S. and PT Ernst & Young Indonesia. Phenomenon Subprime Mortgage market meltdown that happened since mid-2006 had a negative impact on sentiment in the capital markets, including Indonesia. In order to understand what was happening, need to understand whether the subprime mortgage loan and its characteristics. Understanding Subprime Mortgage Loan Subprime mortgage loan in the United States provided to consumers who have credit worthiness is less than adequate. One way to measure consumers' creditworthiness be done by looking at credit score. Mortgage delivery system in America is dependent on credit score issued by companies such as credit scoring methods that use the FICO. For information, consumers have a FICO score buffer ranging from 300 s / d 850 depending on the results of calculations performed by the service provider to see ceridt score by 5 main categories as below: 1. Payment history (35%) 2. Amounts owed (30%) 3. Length of credit history (15% 0 4. New credit (10%) 5. Types of credit used (10%). Although changes periodically, the current average credit score for consumers in the United States ranges from 620. The lower the credit score (FICO <620), the less the feasibility of these consumers to get mortgages. Subprime mortgage borrower be given to consumers who have a FICO score <620. In addition to credit score, subprime mortgage loan can also be seen from several things: 1. The high ratio Loan-to Value up to 100% 2. Collateral mortgages that do not meet the fundamental value of his calculations. 3. The lack of mortgage documentation equipment (low-doc) or no verification of income (stated income), the source DOWNPAYMENT & historical works. 4. High Debt - to-Income (DTI) and Payment to Income (PTI) directly above characteristics increase the risk of mortgage dealers. From one side, compensated with a heightened risk of higher interest rates and other special features. On the other hand, high interest rates cause consumers' inability to obtain mortgages. In this case, channeling mortgage mortgage products are still compensate for higher risks but can be accessible to consumers, at least to dioriginasi. subprime mortgage loan products is the famous 2 / 28 ARMS. This type of mortgage developed enough where cover almost 75% of subprime adjustable mortgage loan dioriginasi. This product features the first two-year fixed rate is Teaser Rate and will change at the end of the second year the rate and adjustable each following year. The problem is channeling mengoriginasi mortgage mortgage in measuring consumers' ability to pay by using low Teaser Rate. At the time of mortgage interest rates change by the end of the second year to be adjustable rate, monthly payment a consumer can be increased dramatically because of the margins for customers with high-risk profile can reach 300-500 basis points. This leads to consumers who are less creditworthy trouble paying mortgage payments, and then failed to pay. In addition, there Predatory Lending practices that do bad mortgage dealers. Segments above fool consumers with a variety of tactics such as deliberately giving a high number of loans with high interest rates to the consumers who obviously not pay. is expected in the event of failure to pay the mortgage would be executed mortgages and dealer profit from the sale of his house. What happened to the Subprime mortgage loans in America? growth in subprime mortgage market in America has increased steadily reaching 22% of total mortgages originasi the total remaining loan amount over $ 650 million in late 2006 (see graph). Some of the main factors increasing the market. From the demand side, good housing sector during the years 2002 to 2005, low interest rate mortgage & home price appreciation. From the supply side, with high demand and business opportunities are still open, channeling berbodong mortgage-streaming into this market to offer his services .. With increasing competition, suppliers compete to get a mortgage by offering consumers mortgage products are quite varied in depth without knowing the risks and karakterisktik me originasi provisions relaxkan mortgages. This has resulted in many mortgages with high risk features are approved for consumers who do not deserve. With the decline in the housing sector growth since the beginning of 2006 marked the menurunya increase housing prices and rising mortgage interest rates, many mortgage customers in this market experiencing difficulty in paying the installment and then declared in default. The survey results released by the Mortgage Banker Association (MBA) said that the delinquency rate for subprime mortgage loans for Q4-2006 was 13.33%. By comparison, deliequency rate for prime mortgage loans ranged 2.57%. In the meantime, Foreclosure rate was 2% compared to 0.24% for subprime & prime mortgage loans as of Q4-2006. ratea And Foreclosure inventory is 0.5% and 5.1% for subprime & prime mortgage loans as of Q4-2006 Lessons for Indonesia Market Credit Mortgage in housing has a variety of risk characteristics and patterns can be mitigated by originasi up with a good servicing. In some countries including the United States, standardization of mortgage documents is one effort to create standard & reduce the risk. Benefits from These standards proved to the difference of delinquency & Foreclosure rates between conforming (prime) and subprime mortgage loan. In Indonesia, the standardization of mortgage documents have been created to be used by the mortgage dealer. standardization of mortgage documents covering the 5 topics Originasi, Underwriting, Quality Control, Servicing & MIS. Some examples of the main things in standardization such as how to calculate the LTV is right and its largest limit, type of documentation required and verikasi process needs to be done before the mortgage can be approved, the PTI & DTI. The process of underwriting in which interviews with consumers to get a feeling of dikonsumen is important. In addition, providing education to prospective customers in order to know the mortgage process and the rights & obligations are required. teredukasi Consumers can help to avoid terkibuli by KPR distribution scheme that is not healthy and consumer harm.