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Subprime Mortgage Lending - What's Wrong With It?


									Presented by Daniel Toriola
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Subprime Mortgage Lending - What’s Wrong With It? By Jane A. Smith

For the past couple of years, it seems that every time you open a newspaper or turn on the television, you come up against the subject of subprime lending. Everyone seems to have something negative to say about it. You’d think it was the root of all evil! It’s true that subprime lending has many things about it that are not especially positive. For example, for whom was subprime lending designed? For the subprime, not-quite-good-enough borrower, of course. Often, the person who finds it necessary to borrow at subprime is the person whose credit rating is a bit tarnished, and therefore someone who is considered more likely to default on the loan. Subprime lenders generally specialize in this area. They tend to charge more, both in fees and in interest rates, to make up for the increase in risk of default. How did we allow this to happen? It has a lot to do with greed. Borrowers were greedy, and wanted a way to buy houses they really could not afford. Subprime lenders and mortgage brokers were greedy, and offered mortgages to people they knew shouldn’t be borrowing money at all. Add easy-to-access money and low interest rates into the mix, and it’s a disaster waiting to happen. Once upon a time, not so long ago, you could borrow on the equity in your home – an amount equivalent to 125% of its value. While interest rates were low, many people began refinancing their homes, or taking out lines of credit and loans on their home equity. At the same time, American real estate markets were growing faster than ever before. These individuals figured it would be easy to sell their homes, or refinance again, if they wanted to. Such extravagant growth led to a sudden, but inevitable, decline in the housing market. At this point, these people are in a real bind. They are unable to sell their houses: the value is nowhere near the amount of the mortgages they hold. They are in a position of negative equity: that is, the mortgage is more than the value of the house, and their savings are insufficient to fill the gap. They may have an adjustable rate mortgage (ARM) that escalates regularly. That’s a whole lot of trouble for a whole lot of people! Foreclosures on homes are at a record high. These foreclosures will make the situation even worse, as houses are sold at auction for a fraction of their full market value. There are several other kinds of subprime loans out there that may look tempting to a borrower who has no money for a deposit. An 80/20 mortgage is one of these. This one is the epitome of greed; no
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Presented by Daniel Toriola
borrower with an ounce of financial responsibility should even consider these loans. Eighty per cent of the asking price is borrowed through a conventional fixed-rate mortgage or an adjustable rate mortgage. Then you borrow the remaining 20% of the price as a loan on your home equity. The rate of the latter mortgage will be higher. The lender can decide to readjust some of these mortgages on a whim. Negative amortization mortgages and interest-only mortgages are also motivated by greed. Both types benefit only the lender, not the borrower; as time goes by, the loan just gets bigger. Although monthly payments are not too large during the five-year or ten-year term of the loan, none of the principal has been repaid, and there is an enormous “balloon payment” awaiting the borrower when the term ends. These are a few of the things that are wrong with subprime lending. Keep an eye out for mortgage plans that actually are of greatest benefit to the lender! Learn more about Interagency Statement On Subprime Mortgage Lending as well as Statement On Subprime Mortgage Lending only at , the premier resource portal on subprime lending crisis.

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Subprime Mortgage Lending: What’s Good About It? By Jane A. Smith

In recent months, the media would lead us to believe that the risks and damages possible in subprime lending have ruined everyone who has chosen this kind of mortgage. While there have, indeed, been many catastrophes in this area, not all cases of subprime lending fall into this category. Some subprime lending benefits do exist. Someone who borrows at a subprime rate pays a higher rate of interest than the “prime,” or currently normal, rate of interest. Often, the only way people with a poor credit score (FICO, or Fair Isaac Corporation score) can obtain a mortgage is by borrowing at a subprime rate. But perhaps your credit history is compromised because of a past circumstance that is behind you. Maybe temporary unemployment, a divorce, or some illness in the family that ran up your bills was the cause of your credit problem. You are, nevertheless, still considered to be a subprime borrower. However, here is some information on how you may still reap the advantages of subprime lending, even if your past credit history hasn’t been the best. You, too, can get a mortgage and become a homeowner. People whose credit ratings indicate past problems are classified as subprime borrowers, simply because the risk to the lender is perceived as higher than normal. But subprime lending is sometimes called “second chance” lending, and that’s because subprime lenders give responsible individuals a second chance to improve their credit. The most important thing to remember if you are one of those individuals is: do not buy a house you cannot afford! You may be told that you “qualify” for a higher mortgage on a more expensive house. Pay no attention to that information. Buy the house whose costs you know you will be able to handle. Let’s look at an example. You are currently renting a house at an amount with which you are comfortable – say, $1,000 a month. With that rental payment, you have still been able to put something away monthly toward a modest deposit on a new home. You have a rather poor FICO score, and so are classified as a subprime borrower. When you meet with a lender to discuss a mortgage, you’re told that you “prequalify” for a mortgage of $300,000. Consider what buying a house in the range of $300,000 would mean to you. Besides the mortgage, there will be property taxes and homeowners insurance to pay. You’ll probably want to consider a fixed-rate 30-year mortgage: what will the subprime rate on such a loan be monthly? You’ll find it significantly exceeds the $1,000 you are presently paying, which is within your budget! The smart thing to do is to forget about that maximum amount for which you qualify. Don’t let a broker convince you to purchase a bigger, more expensive home than you could afford. You will be able to find plentiful bargains in the present real estate market. Look for those, do the math, and find something that’s not going to cost you much more than what you pay now in rent. Budget carefully, and always keep that budget in mind when you’re looking at houses. Subprime lending does have its risks, that’s true. But there are benefits as well, especially for people whose credit may have been compromised. Make absolutely sure you understand everything you sign, keep focused on your budget, and you’ll be one of the folks who gets a second chance through subprime lending! Learn more about Definition Of Subprime Lending as well as Subprime Mortgage Lending when you visit , the online portal for subprime lending crisis resource and help

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