Wherefore Art Thou, Sub-Prime?! Three Tweaks and We're BAAACK!

Mortgage and Lending with First Time Home Buyers, Pre-approvals, Fixed Rates 172223

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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If all of these borrowers would get a fixed rate for 30 years why not just put them into Conventional in the first place.  If they can't qualify for a 30 yr. Conv. fixed rate at 5%, how will they qualify at a 30 year fixed rate Sub-prime at 7.5?  100% financing?  No!  Money down would be required and they don't have the money to put down.  It would be a disaster form the start.

Mar 27, 2009 04:56 AM #1
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

When I starting reading your post I must admit I thought you were nuts.  But after finishing reading it I have to say I agree with you.  They do have their place, but NO ARMs, no Zero Down and No stated income loans.  Not so sure I agree about the pre pay penalty... And I'm not even sure it's legal in all states.

Mar 27, 2009 04:59 AM #2
Keller Williams Realty - Austin, TX
Over 2,000 homes sold…..

Those of us that made it through the savings and loan crises in the 80's saw the same thing......Tightening of the belt....then loosening.....then the subprime legislation in '89.  It will all come back and we will all go back to our bad spending habits.....in time...

Mar 27, 2009 05:33 AM #3
Chad McDowell
First Time Home Buyers, Pre-approvals, Fixed Rates - Bothell, WA
FHA and VA Mortgage Loans Snohomish County, WA

Tim-I was hoping that we learned from our "bad habits" but human nature being what it is...you are probably right!

Tammy-I am glad that you dont think I am completely nuts!  And as far as the pre-payment penalties, there are states that will not allow them and I know they arent popular, but my feeling is that there needs to be a motivation from the bank to start writing these loans.  And if there is a certain guarantee of a return, maybe we wont hear so much about "toxic assets" again! 

Tony-The reason they would qualify for Sub-Prime 30yr Fixed vs. Conv 30yr Fixed would be credit score, income verification(Self Employed only)assets.  Same as before, you dont qualify for Conventional, go Sub-Prime.  And I agree NO Zero Down Loans.  What I dont agree with is that no one will have money to put down, I think you'd be surprised.  3.5% is a manageble figure and if they cant come up with it...turn them down!  We dont need the same situation all over again, its OK to say no to extreme risk borrowers with NO vested interest in the home they're buying. 

Mar 27, 2009 06:00 AM #4
Beth Forbes
The mortgage help you want when you need it. - Center Valley, PA
Your 24/7 loan officer

Having been in the mortgage lending business for quite some time in both retail origination, wholesale lending and hard money lending I respectfully disagree. You have the right idea but unfortunately it is still too lienient. FHA loans are fairly forgiving of past credit issues and the typical lender guidelines of minimum scores of 620 generally are not all that tough to meet. I assume you to be talking about people who don'tmeet those requirements. 2.5 to 3 percent above the going conforming or government rate is simply not enough margin since these loans wouldn't have loss protection in the form of mortgage insurance. I also don't think that down payment parity 3.5 to 5 percent is enough. 10 percent, maybe. If I have not demonstrated a willingness to repay credit obligations I should at least be required to put more "skin" in the game. As far as Stated Income loans are concerned I agree that some of those are good loans but I would require 4 years rather than the standard 2 years owning the same company and the same spread of rate/down payment as for the credit challenged. I would also require BIG scores if you aren't going to provide income documentation.

Sorry to have run on like this! I just think about stuff like this all day long...

Mar 27, 2009 07:12 AM #5
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