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The housing market is facing a crisis of subprime lending rates as investors rush to cash in on the housing bubble.
The FHA mortgage rate is currently at a historically low 2.45%.
Subprime rates have risen sharply since late 2016, reaching a high of 7.95% in late 2017, according to research firm Fitch Ratings.
Subprime borrowers are borrowers who have a credit score below 580, which is considered a low credit score.
They are more likely to be unemployed, under-employed or under-pursuing their education.
The median FHA loan was $1,095 in August, according the Mortgage Bankers Association, which represents lenders in the industry.
A $1 million mortgage would cost $1.8 million in interest, according research firm BMO Capital Markets.
“The subprime market is the lowest it has been in decades,” said Adam Kott, senior economist at Bankrate.
“The market has gone to extreme lengths to make sure it has a strong cushion of funds to absorb the higher interest rates that have been rising.”
The Fannie Mae and Freddie Mac mortgage companies have said the interest rates on subprime mortgages are higher than those on home equity lines of credit (HELOC).
In a letter to investors released on Wednesday, the two mortgage giants said that “federal regulators have signaled their intention to ease the rules on sub-prime mortgage servicing, and there are several indicators that that may happen by the end of this year.”
“This means there is a significant opportunity for subprime borrowers to leverage their assets,” the letter added.
“As investors and regulators move forward, it will be important for lenders to take the appropriate steps to minimize their exposure to these risks.”
A similar letter was sent to the Federal Reserve Bank of New York on Tuesday.
“Fannie and Freddie have made it clear that they expect to increase their leverage as they develop and implement the reforms they have outlined,” said Jamie Goguen, senior director of investment strategy at Fitch, adding that “subprime lenders have responded to these pressures by raising rates substantially.”
According to research from Credit Suisse, a research group, the average FHA-subprime mortgage loan is now about $1m.
That is down from a peak of $2.6m in August of last year.
In the past three years, average home equity loan rates have been higher at 5.25%, 7.7% and 7.8%, respectively.
Home equity loans are loans backed by a home’s equity, which can be either equity in real estate, land or cash.
Subprime lenders typically borrow from non-prime lenders.
“This has been a key driver of the housing crisis,” said Andrew Tull, chief investment officer at H&R Block.
“These low interest rates have led to subprime lenders moving to sub-market mortgage loans.
These low interest loans are very attractive to investors and borrowers, and it is a big problem for the overall market.”
In a separate report, Moody’s Investors Service downgraded the outlook for the FHA and Fannie.
“We believe the outlook is more positive for mortgage lending overall, given the improvement in economic conditions and the continued improvement in the economy,” Moody’s said.
The outlook is less rosy for mortgage-backed securities, which are loans that are backed by collateral such as bank deposits.
The downgrade for mortgage securities is not yet available.
According to a statement from Moody’s, the Fannie and FHA “are not yet able to meet the full expectations of the FCHF (Fannie Mae) and FMIH (Freddie Mac) mortgage finance organizations, and are in need of additional assistance from regulators.”