Subprime mortgages - what most consider the epicenter of the financial meldown - are coming back.
Sub
prime mortgages were meant for borrowers with less than prime credit.
It started out that a subprime loan came with a higher interest rate and
a larger down payment. It slid into not requiring any income
verification of the loans, then no asset verifications (with yet higher
rates and higher down payments) to offering literally lowering the down
payment and increasing the rate higher and higher. In fact, lenders
were so hungry for the returns that they offered adjustable loans with
teaser interest rates and moved into "interest only" mortgages -
requiring the borrower to only pay the interest and never pay the debt
off. If not bad enough, there were negative amort loans - which allowed
the borrower to pay less than was required to pay the mortgage, which
meant that their mortgage debt increased, not decreased. And, let's not
forget that lenders got into giving out home equity loans with the
subprime loans - so you got two mortgages. One for 80% of the value and
one for 10%, 15% of the value - which meant you only put down 5%. It
actually got worse when lenders came out with the "125's". Those were
125% loan to value loans - which meant if you bought a 100,000 dollar
house, the bank would happily lend you 125,000.00 to buy the house.....
The appetite for those loans by investors was voracious. Big banks
bought sub prime lenders and got in the game. It got huge. In fact, in
2006 and 2007, more people were doing subs than doing your normal
Fannie Mae or Freddie Mac loans. And, forget FHA - they required too
much verification and too much insurance premiums - and Realtors steered
borrowers away from an FHA for fear of the appraisal - which was more
stringently done on an FHA financed property.
Subs are
back. Now they are being hawked to borrowers who have fallen outside
the tight lending criteria that came into place after the crisis. When
lenders would lend without regard to income, now they lend with regard
to ability to pay and most won't lend to someone with less than a 640
credit score - and that credit score will cost you in points and fees.
Over 700 and maybe you won't have points. So, young people starting out
are locked out of the housing market. And, we wonder why the housing
market has stumbled and stumbled since 2010.
The new
subprime loans come with higher interest rates than being offered to
borrowers with 640 abd higher credit scores. The loans can not have
rates that increase if a borrower defaults nor any pre payment penalty
should the borrower pay off their mortgage sooner (inheritance, sale,
re-finance). And, the borrowers do need to complete homeownership
housing counsling.
But, while not as wild as before,
they are back. Some do not call them sub prime, they call them
alternative mortgage products. They argue it opens to doors to people
who in other days easily qualified.
What ever happened
to the days when common sense underwriting was done on each loan? No
two borrowers and no two mortgage applications are the same. With
automated underwriting and investment firms seeking every higher returns
- all that went out the window. For every borrower who lied and
fabricated supporting documentation for their loans - lending became a
nightmare. In the good days, those who say got hit with a medical
emergency were approved because an underwriter underwrote the loan and
got the documentation proving they were on time with their payments
prior to the emergency, have stable income and all that portends
stability and ability to pay. But, that is all gone now and those and
new home buyers are the ones aone's who today are paying the price.
The Funding Source Syracuse
