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The Second Wave

The sub-prime tidal wave might have passed, although the second major wave is on its wave. The problem with prime borrowers is going to hit the real estate market soon, as prime borrowers run into difficulty making payments on their loans.

The problem with prime borrowers isn’t the falsification of income or loan documentations, instead it is unemployment.  As prime borrowers lose their jobs they will struggle making payments on their loans. The ones that are able to find another job will have to take on steep pay cuts, making it hard to balance their personal books.

The prime borrowers’ defaulting on their loan will be a challenging situation for the real estate industry. In most cases, prime borrowers bought houses with extremely high values, whereas the sub-primer borrower was buying houses at the average or below-average valued houses. The sub-prime properties have been quickly taken out of the market by investors or others who can afford to buy these houses at huge discounts. When you are talking about a house with an average value of 150-300K, you can find investors or first-time buyers can come up with the down payment and afford the interest payments. Although when you start talking about houses with 600k-1M in value, there are not many individuals who will be able to afford these houses. So you will have a situation where the banks will have to take huge losses on the values of these houses or be stuck with them for a long time. In either case, the second wave is coming and it won’t be an easy situation to fix.

The Washington Post has a good article on unemployment and the impact on prime borrowers.

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