How Subprime Mortgage Delinquencies Can Affect New Home Buyers

Subprime mortgage delinquencies compromise the assets of an otherwise profitable lending institution. To make new loans, a lender must first have a good balance sheet. This means the lender actually has the cash for the loan; if the lender does not have the cash, a good balance sheet will allow the lender to borrow the cash. When a lender currently has a number of liabilities instead of assets, it can be short on cash and short on options to provide you a new home loan.

Delinquency is a Liability

A mortgage loan is considered an asset to a lender. It represents an income stream in the future. In fact, the loan can be sold or traded as an asset on the open market in many cases. As soon as that loan heads toward default, however, it becomes a liability. This means it counts as a negative instead of a positive on the balance sheets at the end of the month. While delinquencies are not necessarily liabilities just yet, they represent loans that could soon become liabilities. If a lender has too many loans in delinquency, then it could rapidly lose a high amount of revenue and assets.

Subprime Loans have High Delinquency Rates

Subprime loans often fall into delinquency for two key reasons. First, they are subject to rate increases. In fact, they are subject to rapid, large rate increases that can suddenly increase the monthly loan obligation a borrower has. This can limit a borrower's ability to pay even if he or she had been saving for the payment. Unfortunately, the second reason these loans often go delinquent, many subprime borrowers have bad borrowing habits. They used a subprime loan because they did not qualify for a standard mortgage. This is an indication that they previously had a bad credit record. While some will recover and practice better habits in the future, many are prone to constant delinquencies.

Lenders Can't Get the Cash

It is impossible for a new home buyer to get a loan if a bank or lender simply does not have the cash. This occurs in a time of high delinquency. The lender cannot count on a revenue stream from multiple borrowers. Further, since the bank has a number of liabilities, it may be unable to simply get a loan from another bank or institution. In many ways, the bank is the loser. The bank cannot count on your loan as a new revenue stream. You lose as well, because you cannot find the loan you would like for your home.

Lenders Shy Away from Risk

Subprime mortgage delinquencies harm high risk borrowers much more than low risk borrowers. If you have a big down payment, a large, stable income and good credit, you will be able to find a loan in most economies. If you are the type of borrower that would qualify for only an adjustable rate or subprime loan, however, you may be in trouble. Lenders with a number of outstanding delinquencies on high risk loans will not willingly take on more of these options.