World financial markets in recent weeks have been bubbling by the subprime mortgage crisis. What are subprime mortgages? And how can RI not join the crisis? The following is an analysis by Sid H. Kusuma, who now joins the SMF and specifically explores the residential mortgage market in securitization, IT, services and risk management consultants. He also joined Citigroup & Bear Stearns Inc. in the US and PT Ernst & Young Indonesia. Subprime Phenomenon Mortgage market meltdown that occurred since mid-2006 has had a negative impact on capital markets including Indonesia. To be able to understand what happened, it is necessary to understand whether the subprime mortgage loan and its characteristics. Understanding Subprime Mortgage Loans Subprime mortgage loans in the United States are given to consumers who have less than enough credit worthiness. One way to measure consumer credit worthiness is by looking at the credit score.
The housing loan system in America depends heavily on the credit score issued by credit scoring companies such as those using the FICO method. For information, consumers can have an FICO score ranging from 300 to 850 depending on the results of calculations performed by the ceridt score service provider by looking at the 5 main categories as below: 1. Payment history (35%) 2. Amounts owed (30%) 3. Length of credit history (15% 04. New credit (10%) 5. Types of credit used (10%). Despite changing periodically, at present the average credit score for consumers in America ranges from 620. The lower credit score (FICO <620), the less feasibility of the consumer to get a mortgage. Subprime mortgage borrower is given to consumers who have a FICO score <620. In addition to credit scores, subprime mortgage loans can also be seen from several things: 1. High ratio of Loan-to Value up to 100% 2. Mortgage collateral that does not meet its fundamental value calculation 3. Incomplete documentation of mortgage (low-doc) or no verification of income (stated income), downpayment sources & working history 4. High Debt-to -Income (DTI) and Payment to Income (PTI) The above characteristics directly increase the risk of mortgage lenders, from one side, the higher risk is compensated by high interest rates and other special features. reduce the inability of consumers to get mortgages.
In this case, Home Loan suppliers make Home Loan products that continue to compensate for the high risk but can be reached by consumers, at least in order to be able to be neutralized. The famous subprime mortgage loan product is 2/28 ARMS. This type of housing loan is quite developed, which covers almost 75% of the adjustable subprime mortgage loans.
This product features the first two years of the fix rate which is a Teaser Rate and will change at the end of the second year to an adjustable rate and every subsequent year. The problem is that the Home Loan distributor in the Home Loan neutralization measures the ability to pay consumers by using a low Teaser Rate. When Home Loan interest rates change at the end of the second year to an adjustable rate, consumer monthly payments can increase dramatically because margins for high-risk customers can reach 300-500 basis points. This causes consumers who are less creditworthy to have difficulty paying mortgage loans, and then fail to pay. In addition, there were Predatory Lending practices carried out by rogue Home Loan dealers.
The above consumer segment is fooled by various tactics such as deliberately providing a high number of loans with high interest rates to consumers who are clearly unable to pay. It is expected that if there is a default, the collateral will be executed and the mortgage dealer will benefit from the sale of his house. What happened to Subprime mortgage loans in the United States? The growth of subprime mortgage markets in the United States rapidly increased, reaching 22% of the total mortgage originations in the total remaining loan of more than $ 650 million at the end of 2006 (see graph).
Some of the main factors are increasing the market. In terms of demand, a good housing sector during 2002-2005, low mortgage rates and appreciation of house prices. From the supply side, with the high demand and the opening of business opportunities, mortgage mortgages flocked to this market to offer their services. With increasing competition, Home Loan dealers compete to get consumers by offering mortgage products that are quite varied without knowing in depth the characteristics the risk and relax the terms of the Home Loan origination.
This has resulted in many mortgages with high-risk features being approved for unworthy consumers. With the declining growth of the housing sector since the beginning of 2006 which was marked by a decrease in housing prices and an increase in mortgage rates.
World financial markets in recent weeks have been bubbling by the subprime mortgage crisis. What are subprime mortgages? And how can RI not join the crisis? The following is an analysis by Sid H. Kusuma, who now joins the SMF and specifically explores the residential mortgage market in securitization, IT, services and risk management consultants. He also joined Citigroup & Bear Stearns Inc. in the US and PT Ernst & Young Indonesia. Subprime Phenomenon Mortgage market meltdown that occurred since mid-2006 has had a negative impact on capital markets including Indonesia. To be able to understand what happened, it is necessary to understand whether the subprime mortgage loan and its characteristics. Understanding Subprime Mortgage Loans Subprime mortgage loans in the United States are given to consumers who have less than enough credit worthiness. One way to measure consumer credit worthiness is by looking at the credit score.
The housing loan system in America depends heavily on the credit score issued by credit scoring companies such as those using the FICO method. For information, consumers can have an FICO score ranging from 300 to 850 depending on the results of calculations performed by the ceridt score service provider by looking at the 5 main categories as below: 1. Payment history (35%) 2. Amounts owed (30%) 3. Length of credit history (15% 04. New credit (10%) 5. Types of credit used (10%). Despite changing periodically, at present the average credit score for consumers in America ranges from 620. The lower credit score (FICO <620), the less feasibility of the consumer to get a mortgage. Subprime mortgage borrower is given to consumers who have a FICO score <620. In addition to credit scores, subprime mortgage loans can also be seen from several things: 1. High ratio of Loan-to Value up to 100% 2. Mortgage collateral that does not meet its fundamental value calculation 3. Incomplete documentation of mortgage (low-doc) or no verification of income (stated income), downpayment sources & working history 4. High Debt-to -Income (DTI) and Payment to Income (PTI) The above characteristics directly increase the risk of mortgage lenders, from one side, the higher risk is compensated by high interest rates and other special features. reduce the inability of consumers to get mortgages.
In this case, Home Loan suppliers make Home Loan products that continue to compensate for the high risk but can be reached by consumers, at least in order to be able to be neutralized. The famous subprime mortgage loan product is 2/28 ARMS. This type of housing loan is quite developed, which covers almost 75% of the adjustable subprime mortgage loans.
This product features the first two years of the fix rate which is a Teaser Rate and will change at the end of the second year to an adjustable rate and every subsequent year. The problem is that the Home Loan distributor in the Home Loan neutralization measures the ability to pay consumers by using a low Teaser Rate. When Home Loan interest rates change at the end of the second year to an adjustable rate, consumer monthly payments can increase dramatically because margins for high-risk customers can reach 300-500 basis points. This causes consumers who are less creditworthy to have difficulty paying mortgage loans, and then fail to pay. In addition, there were Predatory Lending practices carried out by rogue Home Loan dealers.
The above consumer segment is fooled by various tactics such as deliberately providing a high number of loans with high interest rates to consumers who are clearly unable to pay. It is expected that if there is a default, the collateral will be executed and the mortgage dealer will benefit from the sale of his house. What happened to Subprime mortgage loans in the United States? The growth of subprime mortgage markets in the United States rapidly increased, reaching 22% of the total mortgage originations in the total remaining loan of more than $ 650 million at the end of 2006 (see graph).
Some of the main factors are increasing the market. In terms of demand, a good housing sector during 2002-2005, low mortgage rates and appreciation of house prices. From the supply side, with the high demand and the opening of business opportunities, mortgage mortgages flocked to this market to offer their services. With increasing competition, Home Loan dealers compete to get consumers by offering mortgage products that are quite varied without knowing in depth the characteristics the risk and relax the terms of the Home Loan origination.
This has resulted in many mortgages with high-risk features being approved for unworthy consumers. With the declining growth of the housing sector since the beginning of 2006 which was marked by a decrease in housing prices and an increase in mortgage rates.
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