Not a day goes by that you do not hear about the Subprime Mortgage Market disaster and how many people have lost their homes due to bad loans, dishonest mortgage lenders, etc.  But will the effects only be felt in the Subprime Markets?  The answer may surprise you.

First, let's talk about the real Subprime Market, you know, the ones with bad credit and riskier loans in general because of it.  These are the ones that are typically placed into 2 or 3 year ARMs with associated pre-payment penalties.  These clients carry higher interest rates, larger margins, etc. due to their lack of creditworthiness.  Since they likely cannot handle the larger payments when the loans do adjust, they end up in foreclosure, short sales, etc.

Then we have the Alt-A type market.  These are still wrapped in the Subprime Market category as they are not "A-Paper" loans.  These consist of many of the so called "exotic" loans like the Pay Option ARM.  They also cover most Stated Income loans through No-Doc loans.  All of these carry a higher risk and subsequently higher interest rates and worse terms in general.

I will go into the crap that is developing related to these "exotic" loans in another blog.  For now, I am going to stick with the effects spilling over into the "A-Paper" market. 

There are many factors that drive Mortgage Interest Rates as they are based on Mortgage Backed Securities, specifically the Bond market.  Economic reports, news, emotions, etc. all play a role in driving mortgage rates.  The Subprime woes are contributing to the rising interest rates we have been seeing, and will likely continue seeing in the near future at least.

Why?  The Subprime Market represents a portion of our economy.  Particularly, the lenders failing these days are not helping Bonds overall.  Standard & Poors and Moody's are either downgrading or already downgraded Mortgage Backed Securities as they relate to subprime loans.  Since a portion of these loans get bundled in with normal A-Paper loans, the whole Mortgage Bond Market suffers from the perceived increased risk.  In other words, mortgage rates go higher based on the news.

Additionally, lenders have been racing to change underwriting guidelines and many lenders that used to do subprime loans do not anymore.  These same lenders are tightening standards on A-Paper loans as well, so the effects are seen in harder to close loans, even when they used to make sense.  There was a time when a day wouldn't go by without at least one lender making an announcement of a change.

Now, politicians and regulatory agencies are trying to "protect" the market and are asking for stricter requirements.  What good is that going to do in reality?  Probably nothing, as it will likely be that the "patient" has already bled to death.  All it will do is make it harder and longer to get a loan, particular for those who could really benefit from those exotic loans (yes, they are beneficial for many - again, another post).