Foreclosure and Subprime Myths


It’s amazing to me to listen to the comments made by alleged professionals in the financial industry and how quickly the press endorses it without any research in to the real issues.

To allocate all the blame on sub-prime mortgages, Wall Street Investors and God Forbid mortgage brokers for the rapid rise in foreclosures in the country because of taking additional risks to lend up to 100% on a purchase is ridiculous and ignorant. To ignore the economically depressed reasons and over inflation of the real estate market sounds like an agenda, let alone has only a small basis for argument.

Times are tough right now and the emotions that run with it are depressing. Let’s look at some of the statements that have been run through the media. “Sub-Prime loans caused the foreclosure and economic crisis”. 100% financing programs are detrimental. Borrowers should be putting 20% down. Sub-Prime Loans are predatory lending. Most of these loans were done by unscrupulous mortgage brokers. The borrowers couldn’t afford the loans.

No one wishes to see people lose their home. This would include the investors who took the greatest risk, allowing home buyers to purchase with little or no money down. Do you really think they wish to become property owners? How about the Real Estate Industry who oversold and inflated the values? This has been a five year bubble waiting to burst and they knew it. Of course we won’t get any articles about this in the news industry as the Real Estate market is their largest advertiser. To the lenders that quickly blame mortgage companies and state they hurt the community with these loans and foreclosures, I would suggest you think about that when you finance builders with inflated value sub-divisions and certainly look to get first shot at the residential mortgages. The bank community easily targets this to further their argument to eliminate competition with mortgage companies which provide more products and services, let alone takes a share of the lending market.

We do agree that sub-prime or non-conforming has had a contributory impact with the economy. As far as 100% loans should be eliminated, how would we go about it? Remember, FHA is 97% financing. VA is 100% financing. Oh, by the way, those are Conventional Programs. How about conventional financing with PMI? Be careful what you wish for. Yes, there were some unscrupulous mortgage companies and lenders but at what percentage? The larger impact is with mortgage Securities that funded these non-conforming products and impacted Wall Street. But again, at what percentage? How about the Oil Industry? What kind of margins are they making? I don’t see any government effort to regulate Oil Prices. Remember, the price of Oil affects us all. This would include utility companies, Electricity, Natural Gas, Propane, Plastic and Diesel Fuel to the Trucking industry hitting $5.00 a gallon. Remember, the nation moves by truck, not the railroads. This affects cost of goods down the line. Cost of Steel to the cost of Flour.

There is no question that there were people in the business that took advantage of the loan programs. We have to take a look at the entire industry and how true professionals are supposed to handle it. Let’s define Sub-Prime, personally I don’t like the sound of that phrase when it’s pronounced. I call it Non-Conforming. Sounds better doesn’t it? All mortgage programs are based on risk. For instance, Conventional Mortgages have the best rate and terms because they require full documentation and verification of income and credit. That means the risk is less to the investor/lender and the terms are more favorable to the borrower. These are called conforming loan products, or conventional. Non-Conforming loans are not all new to the industry. Even conventional lenders lend to borrowers that can’t fit in the conforming risk box. This would be qualifying under conventional income ratios such as 28% and 36% of gross income ratios. I’ve seen income ratios move up to 39% and even up to 45% under FHA guidelines.

When the credit is good but the income can not be verified, such as with self employed borrowers, then we have “Stated Income” or “No Income” programs. The risk is higher, so therefore, the rate is higher with the LTV (lend able amount) on the loan less than a conforming mortgage. This generally means that on the initial application, the income area is avoided and implied. Several years ago, the Non-Conforming programs (or Sub-Prime as other like to call it) really came in to being. They did fill a gap for the borrowers that could not quite qualify for the conventional programs. The rate was higher because of greater risk. There are fixed rate programs but the rates are usually prohibitive. They usually provide “Arms” (adjustable rate mortgages) structured either as a two year, three year or five year fixed rates, amortized over 30 years to keep the payment down. These loans are designed to be able to achieve home ownership and bridge the short term goals to qualify to refinance with conventional mortgage financing. Remember the non-conforming lender will lend on open charge offs and judgments with sufficient aging on the accounts whereas conventional programs won’t. (See my other article on “The Credit Myth”)

I own one of these mortgage companies and can say that when we do sub-prime mortgages, we go to every effort to try and ensure affordability. I can say that we have seen more success stories than failures because of the opportunity buyers would never have had. The best news is that we give all of our borrowers in these programs steps to take to qualify for conventional mortgages and lower payments significantly in the next 12 to 18 months. These loans are generally designed to be a bridge to better financing options in the future.

Real Estate always has cycles and the market values always seek adjustments during these times. Are the experts going to tell me that every down cycle we’ve had is because of sub-prime mortgages? You notice in the Wall Street hype about the numerous sub-prime companies that have failed. Are we now going to blame sub-prime lenders for the downturn and forget the Asian market crashes that were the real triggers? Look at the past history of the cycles of Real Estate, than make your opinion. I would still rather invest in Real Estate than Wall Street.

In addition, to the ignorant bank professionals that state mortgage brokers and companies are sub-prime driven, think again, we do conventional and still beat our competition with better rate and terms. By the way, we have to disclose all of our fees, including, yield spread premium, yet, they don’t. I am also a Real Estate broker and consultant and am always ready to learn, especially from geniuses like this. Remember, markets like this mean it’s a Buyers market and that means lower prices and more opportunities to first time home buyers who could not afford to buy during the inflated market. I would be glad to debate this with the propagandists. I’m also a Selectman, so be careful, I’m a politician.