The whispers of a subprime lending meltdown have elevated nationally to nothing short of a scream. Some experts across the country are predicting the total demise of this segment of the mortgage lending market, citing that lenders who catered to high-risk borrowers are now feeling the pain due to an increase in loan delinquencies.

The media hype has everyone on edge – even Wall Street. But is this truly a national crisis? Or are the problems relegated to the East and West coasts? More specifically, what the heck does this mean for Texans?  

What’s a subprime mortgage?
While this question may be a bit rudimentary for some, many consumers aren’t exactly sure what a subprime mortgage loan is. The name itself is quite misleading. In fact, I recently had someone say to me that they thought a subprime loan was a loan with an interest rate lower than prime rates. That’s not the case. These loans are actually at higher interest rates than prime mortgage loans.

Subprime mortgages are typically home loans made to borrowers with poor credit ratings, low income, or limited credit histories. It’s likely that these borrowers have credit scores below 620, and do not qualify for loans from mainstream lenders. Subprime lenders rarely identify themselves as such. The clear giveaway is their prices. Having said that, it’s important to understand that subprime loans are not necessarily predatory. But if you qualify for a mainstream loan, you’ll want to avoid subprime mortgage lenders, because you’ll be paying more in fees and a higher interest rate.

What went wrong?
Subprime mortgages used to make up a very small portion of the mortgage market. But the housing boom emboldened many lenders to make riskier loans. In 2006, subprime mortgages accounted for approximately one-fifth of the total U.S. loan market. Many of these subprime loans were made to borrowers who didn’t have the income to make the monthly payments. However, it took awhile to see there would be a problem, because many subprime mortgages began with low adjustable interest rates that climbed significantly during the first few years.

The problem worsened as property values failed to rise as they had between 2000 and 2005. For many parts of the country, home prices flattened – or even dropped –  forcing many subprime borrowers into delinquency and eventually foreclosure.

When the media refer to the collapse of the subprime mortgage market, they’re pointing out the subprime lenders who – due to an excess of faulty loans – have recently gone out of business or scaled back operations dramatically. This doesn’t mean that subprime loans are gone. It does mean, however, that mortgage lenders are tightening lending rules. In the future, mortgage lenders will likely impose tougher requirements – looking for better credit scores and possibly more income. This will likely make it more difficult for many first-time homebuyers to secure a subprime loan. 

What about Texas?
Here in Texas, subprime loans account for nearly 13% of all residential mortgages, and, according to the Dallas Morning News, approximately 16% of those are delinquent. Additionally, only six states have a higher overall mortgage delinquency rate than the 7.4% in Texas. That sounds like a dismal figure, and in some ways it is. But if you live in Texas, then you already know: Texas ain’t like the rest of the country. These numbers don’t mean doom-and-gloom for the Texas housing market – nor does it mean that first-time homebuyers will find it impossible to get into a home.

The real estate industry is cyclical in nature. We have witnessed one of the strongest housing booms in our history, and the market is now attempting to normalize itself. Texas has a strong job market, healthy economy, and moderate home-price appreciation. As a result, it’s unlikely that we’ll experience what has happened in other markets – where values have fallen dramatically leaving subprime borrowers with loan balances that exceed what the home is worth.

Homeownership in Texas
Homeownership in Texas is still significantly more affordable than the country as a whole. According to experts at the Real Estate Center at Texas A&M, Texas has an affordability index of 1.50 compared to 1.06 for the nation. In other words, a Texas family earning the median household income ($54,300) has 150% of the income needed to buy a median-priced home. Nationally, a family earning the median household income has only 106% of the income required to purchase a median-priced home.

Additionally, home prices throughout the Lone Star state are less expensive compared to the rest of the U.S. The national median home price is $227,500, while a median-priced home in Texas is $146,200. So if housing is so affordable, why is Texas ranked seventh in mortgage delinquencies and 19th in actual foreclosures?

Most experts will agree that aggressive lenders made loans to people who simply couldn’t afford to buy at that time. Loans with no downpayment, adjustable-rate mortgages with steep interest rate increases, limited income documentation, and no escrow for property taxes and insurance are all possible factors in the number of delinquencies and foreclosures around the state. While none of these are necessarily bad, buyers need to be aware of the possible consequences.

What does this mean for me?
You’re probably wondering why you should care about any of this. If Texas is different than the rest of the country, will the problems with subprime lenders affect you? Well, it all depends on your situation. Subprime loans will be a bit more difficult to come by for now. Lenders will be looking for borrowers who pose less risk. In the end, that change is probably good for consumers. Getting a mortgage loan with poor credit is not a good thing if you can’t afford to make the monthly payments.

If you are considering purchasing your first home but don’t think you can qualify for a prime mortgage, sit down with your Texas REALTOR® and discuss the various resources and programs out there. You might be surprised. Organizations such as the Texas Department of Housing and Community Affairs and Fannie Mae have programs for first-time homebuyers and those with special financing needs. From low-interest loans to downpayment and closing-cost grants, you may find a program that can help you get into a home and stay there.

If you are currently in a home that you cannot afford, discuss your options immediately with your lender. There are ways out. Many consumers get in over their heads and fail to take control of the situation immediately. Don’t waste time.

Overall, Texas real estate looks strong. While the national median price of a home fell last year, home prices increased moderately in Texas. Residential sales are falling across the nation, but here in Texas, home sales are robust. I obviously can’t predict the future, but I can say that, for now, Texas real estate is still a heckuva deal.