There’s no doubt that subprime lending practices have made home ownership available to many Americans who wouldn’t normally have qualified for mortgaged.
But the subprime market has been rocked by widespread foreclosures and bankruptcies, partly due to shady practices such as stated income forms or "liar’s loans," in which lenders simply accept borrowers’ statements about assets without verification.
Senate Banking Committee Chairman Christopher Dodd, D-Conn., recently urged the Federal Reserve to adopt tighter rules for the subprime market that, at a minimum, require lenders to "fully evaluate a borrower’s ability to repay; requires escrows for taxes and insurance; and restricts the use of low- and no-documentation loans."
Posted by Randy Scholfield
Registered?
Commenting on WE Blog now requires you to be a Kansas.com member. Use the links above to register, if you haven't already, or to log in.Contact us
Follow us
Daily Archives
-
Recent Comments
- Regular on ACORN stole election?
- thomaswitt on ACORN stole election?
- Daniel on Open thread 11/21
- Daniel on ACORN stole election?
- Phantom on Open thread 11/21
- Daniel on Open thread 11/21
- thomaswitt on ACORN stole election?
- Regular on Open thread 11/21
- Phantom on ACORN stole election?
- thomaswitt on ACORN stole election?
27 Comments
“There’s no doubt that subprime lending practices have made home ownership available to many Americans who wouldn’t normally have qualified for mortgaged.”
Duh…maybe their inability to repay a mortgage is the reason they couldn’t qualify?Lenders deserve what they get when they relax the rules to let those with limited financial resources get in over their heads. I don’t feel a bit sorry for them. Just like the credit card companies that will extend credit to anyone, including the family dog, then cry foul when that over extended consumer takes out bankrupcy, leaving them holding the bag.
I wrote mortgages in 2003 and 2004. There were many products available to borrowers with good and bad credit. The no doc/low doc products are typically available only to those with a 650+ credit score. The sub prime products were never without documentation. The problem was the loan officers inablility to understand the product which they were selling. Loans that carried short fixed periods followed by adjustment every 6 months for the rest of the term. The borrowers would take these products in order to get a monthly payment that was affordable in the short term. Then try to boost their credit scores and refinance before the adjustment period took effect. Either the borrower failed to improve their credit and did not refinance. Or the loan officer misrepresented the product initially and the borrower was not savvy enough to ask the proper questions. Either way, today you see a record number of foreclosures and the gov’t wants to try to react to it.
I get sent credit card offers like many. (I think my mail box is a credit card offer dump.)
Anyway, I recently got a few that were like 24.99 percent annually. I mean, what kind of nut would take that interest rate?
My house will paid for very soon, so I won’t have that to pay anymore; more cash for the investment kitty. :)
Of course, being a lot bigger fish than any consumer, the Credit Card Industry decided they did not want to hold the bag they crapped in. They lobbied Congress to amend the bankruptcy laws making it much more difficult for consumers to qualify for Chapter 7 bankruptcy (in most cases, Chapter 7 would eliminate the debts, Chapter 13 is more like a payment plan where you still owe many of the debts.)
So the Credit Card Companies allowed (even marketed their services to) people to have unsecured credit in amounts where those people’s ability to repay was uncertain. Then when the Credit Card Companies had too many losses from this they asked our Government to intercede. The Congresspeople that you and I elected to represent us and our best interests then sided with the credit card companies to protect their financial interests over those of their constituents.
What I am not seeing here is anyone calling for those using such credit to be held accountable for their own actions. When I purchased my last house, i was told how much of a loan I “qualified” for. The problem was that was way more than i figured I could pay and still have a life. I paid less than 1/2 of what I qualified for. Because that is what I could afford. I drive older cars because that is what I can afford. I do not have a 52 inch hdtv because I can not afford it, no much how much credit I have, or my credit score. I don’t have a laptop, take yearly vacations to exotic places, etc. I try to live within my means. i don;t always, which means because of some poor choices a few years ago, i have extra debt. But in about 4 years, that will be gone. In the meanwhile, I am not trying to buy a new luxury car, a new house, etc.These people need to be held to account for the poor decisions THEY made, not the financial institutes that enabled them.
I was in finance for 8 years in both the car business and the mortgage industry. The one insight that I can give is that people overextend themselves constantly. We live in an “instant gratification” society. We do not know how to save and plan for a major purchase. Our society will sign up for just about anything as long as they can have it now. This has never been more prevailant than today. With a record number of foreclosures and the high levels of credit card debt show that most Americans live above their means. Its silly to buy groceries or other perishibles with a credit card. Consumers must make better choices when it comes to finances. When someone has 50k in revolving credit card debt then there is a problem with their buying habits. Sounds extreme, but I can remember many, many people that have huge revolving debt and poor cash on hand.
I am all for personal responsibility, but come on. If you give a 10 year old a gun and a target with no parental supervision they are going to shoot something.
The banks and credit card companies are professionals at risk management. They know these types of loans are high-risk because they have done extensive analysis and calculated that there is a good chance the borrower will not be able to repay the loan – that is why they charge such high rates, to mitigate their risk. There is even a special term in the banking industry for this: Subprime Lending. Lending an amount of money to a consumer with certain economic characteristics (or lack thereof) is not the ideal type of loan for the institution, hence subprime.
There is government regulation to protect people from all sorts of things they can do to themselves. I am not particularly a fan of those types of laws, but apparently many voters are. If the Government (and the people) think it is appropriate to require me to wear a seatbelt, prevent me from legally gambling (in Kansas, except the lottery, or some not-for-profit events), prevent me from buying absinthe at liquor stores, etc., why is there no regulation to protect people from spending way more than they can afford and thereby committing financial suicide?
Yes, they are subprime. Yes, they are charge more interest to cover the higher losses. Sowhat? these people are rquired to be of adult age, nto “10 year olds”. The financial institutions make loans available to people with problems.I guess better to not let them have any credit? The problem is they want the nice cars, the nice houses, the nice whatever because they want it, now. No waiting. This is the microwave era. Instant gratification. A good many are those in the 20-30 age group who want instantly to have what their parents have worked a lifetime to get. in general, people don;t care howmuch something costs, they care about “what’s the minimum payment” I can make. Hence 72 month car loans.None of this makes the financial institutions complicit. They are not forcing anyone to borrow money. They are saying here it is if youi want it, you can get it. But because your payment guarantee is less certain, we will charge you more. And they line up in droves. Sad, but true
What you say is true Brian. But it is an indicator for the economy number 1 and an indicator of the public’s “instant gratification” problem number 2. Sub prime loans are higher interest and are not attractive for buyers with good credit. The problem is that if the housing market fails then our entire economy is in danger of failing. New home starts are a key economic indicator. By the feds trying to unring the bell is futile. Foreclosures are going to continue to be high for many years to come. Tightening the purse strings is one part of the solution. The other is to help those borrowers in trouble somehow. This will have to come from someone smarter than myself.
There are such guidelines in place for FHA/VA or Fannie Mae mortgages. These are highly regulated and controlled(also gov’t insured). But who gets those loans? The consumer with a 620+ credit score. The guy or gal that has decent credit and understands how to budget and not over spend. Where those regulations are really needed is the sub prime market. Make the sub prime borrower go through financial planning classes and try to educate them. The gov’t should be insuring these loans due to the high risk of default. Instead they insure the loans that have the lowest chance of default. Doesn’t make sense.
The gov’t should be insuring these loans due to the high risk of default. Instead they insure the loans that have the lowest chance of default. Doesn’t make sense.
Posted by: Mike | June 11, 2007 at 09:51 AM
I am lost here. My simple mind does not absorb well, especially on Mondays. Could you please clarify what your are saying?
The government insures all Fannie Mae(FHA) and VA mortgages in case of default. This protects the lender issuing the mortgage from loss. The minimum credit score to obtain a Fannie Mae or VA mortgage is 620+. Sub prime mortages are not insured by the government and the risk is not mitigated in any way. Thus you see what happens when those loans go into default.
“Sub prime mortages are not insured by the government and the risk is not mitigated in any way. Thus you see what happens when those loans go into default.”Posted by: Mike | June 11, 2007 at 10:17 AM
I read that subprime loans were being bundled and sold as investments. Any comments?
Mike,
Are you then suggesting the feds insure all mortgages, or at least add subprime mortgages to the insured list?
Yes XXX sub prime loans are bundled and sold as investments. But when a lender makes to many loans and tries to hold and service those loans and the loans start to go into default it cripples the lender. This is what has happened with some sub prime lenders. They couldn’t sell off all the loans that they had originated. So, they were stuck trying to service(collect) on them. This is where the unraveling starts. When the servicing slows, the lender has cash flow issues and stops loaning money, which further unravels the lender. Most sub prime lenders sell off 90% of the loans they originate. When investors stop purchasing then the lender is in trouble.
Common sense tells you that if a borrower has good credit then they know how to budget and pay their bills. If a borrower has poor credit then those are the loans that should be insured to mitigate the risk to the lender. With the gov’t guarantee the borrower should be required to attend financial planning classes to better equip them to handle a mortgage. It seemed backwards to me when I wrote mortgages…that the best credit gets guaranteed while the poorest credit is uninsured.
Until you figure the cost. It’s easy to guarantee something when you figure you won;t have to pay. Not so easy when you figure you will. And I don;t know about FHA mortgages, but VA loans was originally set up to “reward” and reassimilate vets returning from ww2. Then, just as a “reward” if you will for those who served our military. I guess Ididn;t realized you have to have a certain credit score. So how average is a 620 score?
Mike, I’m almost afraid to ask this question, but here it is:
Who pays the insurance premiums for these high-risk loans?
Lenders use credit scores as a indicator of default…..800-700=1 in 1,000 will default…..620-700=1-500 will default…..550-620=1-100 will default…..400-550=1-10 will default. Any score below 620 is a sub prime mortgage candidate. 620 credit score is about average for the population. 620 score is typically comprised of 0 payments on existing debt over 30 days late. Typically has less than 40K high credit limit. And debt to income ratio is less than 30 percent. There are more factors to make up a score than I have listed, but know one knows for sure how the score is calculated. If any factor is out of line then the credit score will drop below 620. But on the other side, I have seen folks with good credit stretch their budget and opt for an “interest only” or some other unique product just to get into the house of their dreams….only to watch the payment skyrocket when rates climb. So the problem has two sides. This isn’t just a poor credit issue.
AnonymousThe FDIC. Those policies are not privitized.
“I have seen folks with good credit stretch their budget and opt for an “interest only” or some other unique product just to get into the house of their dreams..”
I know they exist, but they sound like a recipe for disaster. BIg time.
I should have been clearer: For the new insurance I think you’re proposing, who would pay the premiums?
Wouldn’t this insurance be pretty expensive?
And how to deal with the moral hazard that since the loan is insured by the government, there is little incentive for lenders to screen the ability of borrowers to pay the loan, which is thought to be a problem already.
And how to deal with the moral hazard that since the loan is insured by the government, there is little incentive for lenders to screen the ability of borrowers to pay the loan, which is thought to be a problem already.Posted by: anonymous | June 11, 2007 at 12:12 PM
I don’t know how that rumor got started. The one that says sub prime lenders do not check out the borrowers. That is simply not true. Qualifying for a sub prime mortgage is 10 times more difficult than a conventional mortgage. No doc/low doc loans are simply not available to sub prime borrowers. Sub prime borrowers have to prove income with W-2’s, residency with utility bills, and credit discrepencies with documentation. The underwriting process for sub prime loans was very comprehensive.
And to address the premiums for the new insurance I would propose….you would need to make the borrower come up with that premium prior to closing. And set it up in escrow the same as you do with taxes and property insurance.
Mike, I guess I must have misread the news stories.
If sub prime borrowers are throughly vetted for their ability to pay, why is the default rate so high?
AnonymousI don’t have to tell you to take what you read with a grain of salt. The default rate is high due to the early number of defaults and investors not picking up any additional mortgages for their portfolios. Sub prime lending is predicated on reselling the loans to investor groups. When the first wave of defaults occured the investors stopped picking up new loans. This caused the originating lender to have to service(collect) on the loans that they had in place prior to the investors cutting them off. When the lenders could not make new loans and the current loans they had started to go bad then what you see today is the result.
My wife died 17 years ago, and I still get credit card offers in her name about 3 times a week! If only I knew a lawyer who chould make channeling hold up in court…..