The overheated residential real estate market between 2002-2005 gave rise to billions of dollars in "creative" financing and sub-prime loans. The "creative" part was the offer of interest only loans with low initial rates (a/k/a teaser rates) which would re-adjust in about 3 years to an above-market rate. Some $500 billion of these loans will readjust in 2007. For borrowers with little or no equity in their homes, the prospect of an unaffordable monthly payment raises the specter of foreclosure.
Sub-prime loans are offered to borrowers with credit problems at above-market interest rates from the inception of the loan. There is widespread concern that about 20% of these recent sub-prime loans will go into foreclosure in 2007. At least one respected economist, Nouriel Roubini, has written at length about the dramatic impact these foreclosures will have on the lenders who made the loans and the economy in general.
Since these loans are bundled and sold in the secondary market ("securitized"), they are subject to regulation as securities. Last September, various federal agencies issued new guidelines to lenders to tighten their lending standards and reign in the creative financing. These new guidelines, which are quasi-regulatory in nature, have put lenders on notice that residential lending may not be the best place for creativity. Real estate agents should be aware of these guidelines, because a sharp increase in foreclosures may call into question why unsophisticated buyers were sold loans and homes they could not afford.
