Most Jumbos likely to escape national loan crisis
Graham Rogers
Issue date: 1/31/08 Section: Features
College students across the nation may soon face the residual effects of a crashing subprime lending market, which saw default and foreclosure rates skyrocket this summer.
But while the loan crisis has the potential to produce a detrimental effect on many loans to students, Jumbos will likely avoid the worst of it.
Subprime loans are loans given to borrowers who, because of their credit history, do not qualify for the best interest rates the market offers. These often include loans to college students.
The recent lending crisis, which was centered in the mortgage industry, has left several subprime lenders bankrupt and has caused the foreclosure of several million mortgages. According to a recent study by the Center for Responsible Lending, a non-profit organization, nearly one in every five subprime mortgages issued in 2005 and 2006 is expected to fail.
This recent foreclosure spike has sent tremors through financial markets.
During the real estate boom of the early 2000's, lenders made many subprime loans, the most common form of which were adjustable rate mortgages with low initial interest rates. However, interest rates on these loans typically rise sharply after the first few years.
Since subprime loans are typically issued to buyers with less-than-perfect credit histories or low credit scores, they run a high risk of default once the interest rates start to climb.
The high foreclosure and loan default rates have hurt lenders' pockets and scared off investors who would otherwise have provided the capital lenders need to make their loans. As a result, lenders have had less capital with which to make more profitable loans and have lost more and more revenue. This has scared investors further, provoking a vicious downward spiral.
Executive Director of America's Student Loan Providers (ASLP) Kevin Bruns said that many markets have been affected. ASLP is a lending coalition that includes loan giant Sallie Mae and several other subprime lenders.
But while the loan crisis has the potential to produce a detrimental effect on many loans to students, Jumbos will likely avoid the worst of it.
Subprime loans are loans given to borrowers who, because of their credit history, do not qualify for the best interest rates the market offers. These often include loans to college students.
The recent lending crisis, which was centered in the mortgage industry, has left several subprime lenders bankrupt and has caused the foreclosure of several million mortgages. According to a recent study by the Center for Responsible Lending, a non-profit organization, nearly one in every five subprime mortgages issued in 2005 and 2006 is expected to fail.
This recent foreclosure spike has sent tremors through financial markets.
During the real estate boom of the early 2000's, lenders made many subprime loans, the most common form of which were adjustable rate mortgages with low initial interest rates. However, interest rates on these loans typically rise sharply after the first few years.
Since subprime loans are typically issued to buyers with less-than-perfect credit histories or low credit scores, they run a high risk of default once the interest rates start to climb.
The high foreclosure and loan default rates have hurt lenders' pockets and scared off investors who would otherwise have provided the capital lenders need to make their loans. As a result, lenders have had less capital with which to make more profitable loans and have lost more and more revenue. This has scared investors further, provoking a vicious downward spiral.
Executive Director of America's Student Loan Providers (ASLP) Kevin Bruns said that many markets have been affected. ASLP is a lending coalition that includes loan giant Sallie Mae and several other subprime lenders.
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