Here's A Little Advice For All You Sub Prime Lenders Out There

by Paul Romanacci - Date: 2007-03-12 - Word Count: 817 Share This!

Every day we in the mortgage business and everyone else are reading about all of the sub-prime lenders that are going out of business. It seems all the risky loans that they have been funding over the last several years are now starting to default in a very big way. Now the bottom is falling out of the market and the biggest names in non prime lending are biting the dust.

This has huge implications for everyone, not just the mortgage banks. These collapses are already starting to bring down the stock market which is bad news for all of us. What with property prices already in a free fall in many parts of the country, the added economic stress could result in outright recession.

Here is a big part of the problem. Many of the sub-prime loans that were originated over the last few years were 100% financing loans or a combination of 80% first mortgage and 20% 2nd mortgage totaling 100% of the home's value. These borrower's were and are "sub prime" borrowers meaning they are a credit risk. Generally, their FICO (credit report scores) Scores were low, job history shaky and they had very little if any money in the bank as a safety net should anything bad happen.

To top it all off, many of the loans are stated income loans. A stated income loan is one where the borrower(s) state their occupation and their income on the mortgage application, but only their job is verified by the lender. Their income is not verified in any way, no pay stubs, no W2s, no tax returns.

We in the business call these "liars loans". Reason being that if a borrower couldn't qualify for a home with his or her income, we would set them up with a stated income loan, state (lie) enough income for them to qualify, and hand them their keys to their brand new home. Sounds great right? Wrong.

A majority of the sub-prime loans originated were hybrid loans meaning that their interest rates were only fixed for a short time, (mostly two years) after which the interest rate adjusts. Almost all of them see their interest rates rise by two full percentage points initially. This increases the mortgage payment substantially, often leaving the homeowner unable to make the payment.

When home prices were rising by double digits each year this wasn't much of a problem. With the increased equity in the home, the homeowner was able to refinance the adjustable rate mortgage back down to a lower rate where they could afford the payment. However, now that property values have either stalled or declined, there is no room to refinance. Unless the borrower has the money to pay the closing costs out of his own pocket, he's stuck. This is where the downfall begins.

So borrowers who really couldn't afford the home to begin with are faced with tough choices like pay the mortgage or buy groceries or make the car payment. To add further damage many communities have increased property taxes over the last several years which further increased the housing payments. Ultimately, there is no choice but to not pay the mortgage. After all, you can't get blood from a stone.

Suddenly the sub-prime mortgage industry is faced with unprecedented delinquency rates. Foreclosures are through the roof (pardon the pun) and many homeowners are out on the street. What we have is a perfect storm of economic doom. But does it have to be this way?

Interest rates are still historically low. As I write this, a 30 year fixed rate mortgage is hovering right around 6%. So why are the companies who hold all the sub-prime mortgages insisting on raising the interest rates by 2% when the initial fixed rate period is over? Wouldn't they be smarter if they re-negotiated the terms of these mortgages with the consumers and fix the rates right where they are?

Now, I don't pretend to be a financial analyst, only a mortgage broker, but this seems to make perfect sense to me. I think it would be smarter to put a bandage over the existing wounds before we bleed to death. The sub-prime lending community has already begun tightening their guidelines. Most sub-prime lenders have already stopped funding loans over 90% Loan to Value and the day of the stated income loan may be over. This should prevent this from happening again in the future - I hope.

The fact of the matter is that something is going to have to be done. And someone is going to have to pay for this mess and we both know who that is. So before the entire banking and housing market implodes, let's try to find some solutions where everyone wins or at least not everyone loses -- that badly. For daily mortgage information, advice on how to save money on mortgages as well as WHOLESALE mortgage lending rates, you can visit my blog at

Related Tags: mortgage, home loans, bad credit loans, refinancing, buy a home, su prime mortgage, low fico scores

The Mortgage Swami is a veteran mortgage industry insider who is detrmined to expose mortgage lending secrets to the public. His daily blog offers solid advice on how to best secure a mortgage at the lowest rates and fees. On his blog, he also publishes WHOLESALE MORTGAGE RATES (an industry no-no) every day for the public to see in order to further help them.

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