A couple of small tweaks and the Sub-Prime industry could, and SHOULD, be right back in business. OK, OK, so maybe it has a bad rep right now, turn on the news and Sub-Prime lending is to blame for the entire financial state of the world economy somehow. But lets be honest...it has its place and NEEDS to come back.
The premise behind Sub-Prime loans was rock solid. You cant qualify for a conventional or FHA loan...fine. You go Sub-Prime and pay a higher rate. What's wrong with that? Risk based pricingis a great idea. The problem wasnt the premise of risk based pricing, it was the products! You dont put first time home buyers in a Negative Am, Pay-option-ARM loan. You dont have MASSIVE adjustments on Adjustable Rate Mortgages. You dont do Stated Income loansjust because someone doesnt make enough money to qualify! And you dont give ZERO Down financing to someone who has never paid a bill on time in their life!
A couple quick changes and the industry would be back in business. First...NO Adjustable Rate Mortgages. Every Sub-Prime client gets a fixed rate. If Conventional rates are at 5%, Sub-Prime borrowers get 7.5% or so. They pay for their inability to qualify conventionally through a higher interest rate. Nothing unfair about that. They all get Pre-Payment Penalties. Ohh, that will go over good I know. But think about it, what bank is going to loan the money if there is no guarantee that they will receive a decent return on the investment. Pre-payment penalties are their guarantee. We have to have profitable banks or there is no industry. Next, Stated Loans are ONLY for Self Employed borrowers. That's how it started and how it should have stayed. If you have a client with a W2 making $30k a year and that isnt enough to buy the house he wants, sell him a smaller house!! Dont go STATED and put him in a house you KNOW he cant afford! ARM's and W2 Stated loans are two of the BIGGEST reasons this industry collapsed. And last...NO Zero Down loans. People walk away from houses a whole lot easier when they have no vested interest. Now, I'm not saying everyone should have to put down 20%, we'd never close another loan. But keep it on par with FHA, 3.5% down, with a higher interest rate. That's enough money for people to actually have to save, but not so much that they'll never buy a home.
If I had a bank option with those three changes, I could find ten buyers tomorrow. Sub-Prime loans have their place, and if you REALLY want to see the market come around fast, that would certainly do it. We just need to learn from past mistakes, take to good from Sub-Prime mortgages and get rid of all the garbage that caused all the foreclosures in the first place.
I know Sub-Prime loans will come back eventually. Anytime there is an industry with the ability to be THATprofitable, entrepreneurs will figure out a way to make it work. I, for one, hope they figure it out sooner then later.
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