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Understanding Subprime Home Loans

March 14th, 2011

We as a community need to understand that subprime has noting to do with the borrower, except they make payments. It is all about the investor. He, who has the GOLD, writes the RULES. Investors know if you have the propensity to always pay your mortgage on time, you will continue do to do such! You might be late or behind on something else, but you’ll handle the house note or you have no roof to live under. Consider owner occupied rates are lower than non-owner occupied rates, down payment requirements and underwriting guidelines are more favorable toward owner occupied properties than on investment properties. Finance 101!

There was a lot of loose money in investor’s wallets as we moved into the 21st century and investors are always looking for rates of return that exceeds current market rates. These investors invest in loan pools as historically they tend to be safe investments, and all of the professional real estate guru’s were predicting continually increasing appreciation in real estate prices. On the other hand you have Congress had changed the deductibility of interest charges, except mortgage interest. This was a keg of dynamite with Americans trying to live the American by using their home’s equity as a credit card.

Quiet as it is kept, you also had the credit repositories manipulating and adjusting their credit models in creditor friendly ways. I can’t give you an estimate on the number of loans originated where the credit scores were based on an antiquated FICO model. Back in 1999 I was fighting tooth and nail with wholesale lenders as to their credit scores differed significantly from reports I pulled from my credit vendor. I quickly learned lenders preferred using older credit models and they resulted in lower credit scores, therefore they justified higher interest rates and consequently they were able to generate higher loan fees and higher premiums yields when the loan pools were sold in the secondary market.

I shortly (2 months) worked for a company when I first started in the mortgage business (a large national firm), which had developed a software application that would essentially take any loan and compute the loan fees applicable to a Section 32 loan. Then it would adjust the fees downward to display on the estimated HUD1 such that they were slightly below the Section 32 triggers. Clearly, predatory lending at its finest! We were selling high rate loans with exorbitant fees to desperate borrowers who had experienced life issues that required an influx of cash with severely damaged credit.

There is a lot of history that MUST be understood before one can just spew words or wisdom as to how we reached the current state of affairs. It started with the deregulation of financial institutions under the Regan Administration and the weak oversight provided to the activities of these lending institutions. Can we say Savings & Loan crisis? Then to light the match, you had a bunch of individuals to come into the mortgage finance business with neither training nor experience, with their only goal being to make a quick buck! Pair that combination with homeowners who were gullible for what sounded good and what provided a momentary relief from their financial pains. You get sick and tired of collectors calling you daily to make delinquent payments when your money is funny and your change is strange.

No COST, No FEES! Complete joke, the costs and fees are bundled into the loan and rate such that the lender take care of the charge on behalf of the borrower in exchange for accepting a much higher interest rate. Look at your HUD1 and look for entries that indicate Paid outside of closing or (POC). Consumers must understand and realize there are no FREE lunches and if it sounds too good, it probable is. Raise your hands! How many loan officers have originated loans that the exclusive benefits were for the lender and not the borrower? Yeah, the borrower got K cash-out of the loan but it cost him/her k in equity to do the deal. Sounds quite expensive to me!

Borrower’s beware, read and understand the fine print! Don’t take the word of a commission grabbing loan officer, but seek to identify responsible trusted professionals who have your best interest as they advise you. Also remember, your home is not your personal credit card to be used to buy toys or go on extravagant vacations! That’s marketing that make those claims and not Money 101. Marketing will keep you broke, with bad credit and a borrower instead of a lender; Money 101 will make you the lender one day and not a borrower for life.

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