Sub Prime Loans are BACK!!!! Here We Go Again!

Real Estate Attorney with

Apparently the biggest banks in the US didn’t learn their lesson the first time around… 

A few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again! 

It is 2008 all over again.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers. 

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever. 

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it. 

Fast forward eight years and the banks are dusting off the old playbook once again. 

Here’s the down and dirty: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down. 

Now, 3% isn’t as magical as 0% down, but wait - there's more. 

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to a government-sponsored personal finance class. 

Sample interest rates: Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%. 

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate. 

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate. 

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”. 

In its heroic effort to lead the madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average. 


Now, here’s the craziest part: the US government is in on the scam. 

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks. 

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious. 

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.” 

Because that’s precisely what happens. 

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government. 

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER. 

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008. 

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP. 

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates. 

Today interest rates are barely above zero, and the Fed is technically insolvent. 

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.  

It is important to look at objective data and recognize that the colossal stupidity in the banking system never ends. 

Paddy Deighan J.D. PhD


Comments (6)

Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

A Wells Fargo mortgage officer told me "this loan program is safe, only qualified underwritten buyers, etc.".   But to me it looks like a setup for another Boom/Bust!

Jun 14, 2016 11:46 AM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Paddy Deighan JD PhD - well, like everything else, this seems cyclic, too.

Or someone will learn some lessons again... at whose cost, though?

Jun 14, 2016 03:35 PM
Sandy Padula & Norm Padula, JD, GRI
HomeSmart Realty West & Florida Realty Investments - , CA
Presence, Persistence & Perseverance

Paddy Deighan JD PhD The idea of QM loans is rapidly out of the picture with the need that banks have to 'turn a dollar' just to remain open. They ran the gamut on refi loans, so this was the next likely move.

Jun 15, 2016 01:37 AM
Tawny Lynn
Washington First Mortgage Loan Corporation - Seattle, WA
NMLS-57806 Loan Officer Mortgage Originator

These are not Sub-Prime loans and believe me that lenders are underwriting these loans with the same due diligence required for any other QM loan program. There are a few types of  3% down payment  programs were the income requirements will vary between census tracts. In certain census tracts there may or may not be any income restrictions.  The reason is because the tight qualifying requirements have been especially detrimental to people in some census tracts and these areas are considered ‘underserved’. The loan programs do not seek to provide loans to people that can’t afford the payments. The programs simply help to lower the rate of interest these borrowers will be required to pay on their mortgages. Check out my Blog posted today 6/15/2016 Titled, "Now Available 3% Down & Stated Income Loans"

Jun 15, 2016 05:05 AM
Paddy Deighan MBA JD PhD - Vail, CO
Paddy Deighan J.D. Ph.D

for me, the unfairness is that those with good or better credit actually pay a HIGHER eighth of a point as indicated).

Jun 15, 2016 06:24 AM
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Jul 26, 2016 08:13 AM