topic Re: Subprime mortgages are back in Mortgage Loans

Subprime mortgages are back

blunderer — Mon, 06 May 2013 02:31:44 GMT

I saw this article on msn.com and thought I'd share it.....

"A few lenders are offering loans to borrowers with damaged credit. But, unlike during the boom, they are asking for big down payments and lots of documentation."

They're ba-ack. We don't mean ghosts. But some may see the ghosts of the real-estate crash past in the reappearance of subprime loans. According to the Los Angeles Times, more lenders are beginning to offer mortgages to customers with lower credit scores.

But these are not the subprime mortgages that proliferated during the boom, which were bundled into securities and sold on Wall Street. Since the lenders had no risk, they weren't so careful about vetting the borrowers.

Instead, the new subprime lenders are offering mortgages to buyers with credit problems, but they are asking for higher down payments, charging higher interest rates and asking a lot of questions. As the Times writes: "In other words, a borrower's collateral matters, down payments matter, income and ability to pay matter."

In Temecula, Calif., Michele and Russell Poland wanted to get a house in a good school district now, since their son had turned 5. But their credit had taken a big hit from a business bankruptcy and a home foreclosure.

To buy a house, they were willing to make a 35% down payment, pay $10,000 in fees and accept a 10.9% interest rate, about three times the rate paid by borrowers with top credit.

"It was expensive, but we think it's worth it," Russell Poland told the Times. The couple hopes to be able to refinance into a conventional loan within a year.

The subprime business is still a small percentage of the home loan business, less than 0.5% of the loans originated last year. In contracts, more than one-third of the mortgages made in 2005 and 2006 were subprime or "Alt A," meaning borrowers did not have to document their incomes, according to the Times.

The lenders who are moving back into this market see opportunities to give loans to people who can pay them, despite their lower credit scores or past foreclosures.

"There are a lot of borrowers who can make a big down payment, document that they have the income to pay the loan and have a good recent job history — but have a credit score that would make it impossible to get a loan," says Rick Sharga, executive vice president of Carrington Mortgage Holdings, which is one of the companies that is getting into subprime lending.

What do you think? Is making more mortgages available to borrowers with past credit problems a good move for lenders?

Interesting and scary....at least to me.

Re: Subprime mortgages are back

boomhower — Mon, 06 May 2013 05:44:19 GMT

10.9% interest!?!?!?! Holy smokes.

Re: Subprime mortgages are back

tooleman694 — Mon, 06 May 2013 13:17:46 GMT

That is just not right.

Higher down payment, I get it but not interest that high.

If you have had credit problems in the past, making it harder for someone to pay I dont think is the way to go.

Re: Subprime mortgages are back

getmycreditright — Mon, 06 May 2013 13:33:39 GMT

Yeah, that's just predatory and very unnecessary. I hope people will realize that they should just wait until their credit is good enough before jumping into something like that. 10.9% is nuts!

Re: Subprime mortgages are back

Anonymous — Mon, 06 May 2013 16:02:50 GMT

This still seems very predatory to me. Our first home was through a subprime lender and was a 2/1 ARM at 8.1% interest. Yes, the interest rate was lower because it was an ARM but it was back in 2004 when rates for those with good credit and a 30 year fixed mortgage was higher than it is now.

I've waited 7 years since the foreclosure of our first home to get my credit up to par before trying again. The interest rate on my mortgage is 4.125%. I'm glad I waited. 10.9% interest REALLY drops your home affordability by A LOT. Our new home that we closed on in Feb would not be even remotely close to affordable with 10.9% interest. It is these high interest rates coupled with high DTI that led to the crash. Our DTI was so high due to the interest, no one would refinance us. I would have felt a little better about the article if they capped the DTI, but it looks like folks with 47% DTI can be approved for these awful mortgages. When I was approved for a subprime auto loan back in 2008, the lender capped my car payment at $400 per month max. Same thing should be done for subprime mortgages. I highly disagree with subprime mortgage lending. The purchase price of a home is way too large to be hiking up the interest rate like that. Subprime means you pay a larger amount of interest and fees for a loan. But what the subprime industry doesn't understand is that folks with bad credit should be the LAST ones to have to pay more for a mortgage, especially if the payment isn't capped to something reasonable. Folks with bad credit also often times make bad decisions (I have been there so I know). Anyone should know that after being turned down multiple times for something and then approved, the brain tells the mind that it can't pass this up as I will be able to really get a house now and not have to wait. People with bad credit often times get excited over an approval even though the terms are outrageous. Often times there is a small quiet voice telling the person to pass this up and wait but the big voice says, I'm approved! I will show those other guys I can get a house even though disposable income and reserves will be low because of the high interest and large downpayment.

We will see how many defaults and foreclosures arise out of this. The part of the article saying, we plan to refinance in a year. That is what we planned too but because we had no other credit reporting besides the mortgage (could not get approved for just about everything except that stupid mortgage), our scores were still low after a year and DTI was too high to refinance.

Folks that come on here with low credit scores desperate for a mortgage loan, need to truly just wait. You want banks to compete over you instead of having only one Broker in the town or state that wants to approve you. If you don't obsess over a mortgage and just live your life and garden your credit, you will be fair game for many lenders out there before you know it.

I personally believe having good credit is paramount as a homeowner. You may disagree but I have compared my successes as a homeowner with good credit and bad and I have been able to accomplish a lot more for the home with good credit. I couldn't do nothing for our first house with bad credit and a high mortgage payment but live in it while trying to stay above water.

The part of the article that states he had to buy a home so his 5 year old could go to a good school is nothing more than a excuse for instant gratification. But will they still be satisfied with their decision two years from now? I rented from when my son was 7 months old to age 7. He went to good schools in a good neighborhood. Mommy had bad credit and renting was the only financially feasible and sound option.

Some folks think they will be at a 580 score for the next 10 years and their only hope out is a subprime mortgage. That couldn't be further from the truth. If you take the time to garden your credit and watch it grow, you learn some very valuable things. Take the time to learn how to use credit cards the right way as they can be very powerful and important tools to a homeowner. As a homeowner, the last thing you want to be afraid of is credit cards because you haven't learned to use them properly. Lenders want to see revolving credit history for a reason. What good is a house when you get denied for security system install or other related house things that require good to excellent credit? What happens if something major breaks that has to be taken care of right away for the house to be livable? Most often, you have to pay a deductible for your insurance to kick in. What if you just paid the mortgage and are waiting for the next pay day? What if your savings will be too low after paying the deductible? In this instance and instances where you have a lot savings, using a credit card for the deductible would free up your income and protect your savings and earn you $10-$20 cash back. Pay it off quickly over a few months with 0% interest and your savings is still intact despite an emergency and you earned pure cash just for using the rewards card for the transaction. Save some of your monthly budget to pay for things with 0% APR over a few months and you will see there are many things you can purchase for the home in a year without breaking the budget through the use of credit cards. I have one card that is only used for nonrecurring expenses and i have budgeted $110 a month towards this card. when it is paid off, i can go shopping for fun things without breaking the budget nor taping into savings. There are many other ways credit cards are very useful. Dare I mention that homeowners that use rewards credit cards for bills and everyday expenses earn on average $300-$500 in cash back a year? Your trip to Lowes can cost a lot more without a credit card. If you spend $300 at Lowes using cash, you paid $300. If you come in there with a Discover It card that earns 5% cash back, you paid $285. Don't say it is just $15 because there are rewards cards that earn 1-5% cash back on gas, groceries, and utilities. When you compare all of these charges on credit against paying cash, you will see that the person that has credit cards pays significantly less on everyday items and bills. And when you pay in full, no interest is charged. This saves the homeowner a lot of money as cash back can be redeemed as a check or direct deposit to transfer to savings. By using credit cards the right way you have avoided interest, added to savings after a major expense, and added some new home decor, etc. that wouldn't have been possible until much later with cash.

I don't agree with subprime mortgages at all still. I waited. Never thought my score would reach 700 but it did and I obtained a few more credit cards to learn how to unleash their power as a homeowner versus be subjected to debt because I didn't use them properly. There is so much more to homeownership than just the mortgage payment if you want to be truly successful.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 04:38:24 GMT

I agree with the learning part, rebulding your credit teaches you so much. I have friends and family that look to me with their credit improvement questions. I also like the fact of knowing after I close, with all my hard work, I should have no problem getting some prime cards and closing my secured cards.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 04:42:49 GMT

Great post MovingFoward

Re: Subprime mortgages are back

DallasLoanGuy — Tue, 07 May 2013 04:53:38 GMT

@tooleman694 wrote:
That is just not right.

Higher down payment, I get it but not interest that high.

If you have had credit problems in the past, making it harder for someone to pay I dont think is the way to go.

The problem with subprime the last time it was done...... Was that it wasn't priced right!!!!!

10% might be too high.... but it is close.

I put people in 30yr fixed loans at 6%...

Yeah, that looks high today but it is a GREAT deal for them.

Re: Subprime mortgages are back

DallasLoanGuy — Tue, 07 May 2013 04:56:45 GMT

@Anonymous wrote:

Some folks think they will be at a 580 score for the next 10 years and their only hope out is a subprime mortgage. That couldn't be further from the truth. If you take the time to garden your credit and watch it grow, you learn some very valuable things.

Some folks WILL BE at 580 for the next 50 years......

Yeah, some people had some bad things happen and they are good people and can rebound. But some people will ALWAYS pay late.

.... I have seen them.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 12:33:13 GMT

Yeah, the fact is, for every person that learns from credit mistakes in the past, there are 50 who simply don't care. They think they're entitled to pay whenever they want, or however often they want, and should still be extended credit. The number of people i have heard complaining that some bank or car company won't give them a loan simply because they "Missed some payments for 5 or 6 months" is incredible.

I stood in line at a Dunkin Donuts last summer having to listen to some woman complain to her friend that she had to take the bus every day to work because the car company had the "nerve" to take her car back because she didn't make any payments. "I only missed 4 months", she said. Okay...did you not read where it said you have to make the payment EVERY month?

Drives me nuts. Bad things do happen to people. But the bulk of the people who get in trouble with credit do so because either they or someone they are involved with uses credit irresponsibly, and always will.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 12:51:32 GMT

@Anonymous wrote:
When I was approved for a subprime auto loan back in 2008, the lender capped my car payment at $400 per month max. Same thing should be done for subprime mortgages. I highly disagree with subprime mortgage lending. The purchase price of a home is way too large to be hiking up the interest rate like that. Subprime means you pay a larger amount of interest and fees for a loan. But what the subprime industry doesn't understand is that folks with bad credit should be the LAST ones to have to pay more for a mortgage

It isn't that the "subprime industy" doesn't understand.. it's that that isn't their responsibility to worry about it. It's not a lender's job to do what makes financial sense for MY family - their responsibility lies in their own business. If in the process of underwriting, they decide someone can't afford a loan - then they've indirectly done the customer a favor. But it was done to protect the bank, not the customer.

Of course you should pay a higher interest rate if your credit is terrible - it's supposed to be a hedge for the bank against risk - and it's supposed to be a wake up call to the customer that they shouldn't be looking for a home loan right now.

They figure out what someone can afford and if their crazy enough to accept 10 percent interest or 22 percent interest car loans, then it's their own fault.

Re: Subprime mortgages are back

tooleman694 — Tue, 07 May 2013 13:03:37 GMT

I actually think you should max out when buying your first house. Buy the most you can afford. And grow into the payment and house. Take the risk and work hard.

If the crap never hits the fan, it will pay off.

That is what we did when we bought our first house, we stretched it out as far as we could go. Over the course of 10 years my income doubled and the house payment was way easy to make. Our second home we didn't max out though, we came in pretty conservative when you factor in my income and bonus and my Wifes income.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 13:13:42 GMT

I would never advise people to max out ever....unless you have an absolute guarantee that your employment and income status will only improve, and since almost nobody will ever have such a guarantee, it's a bad idea.

If you don't plan for difficulties, you're gambling with your family's home.

There is a long established policy of buying starter homes....flipping them for profit, then rolling the money into a bigger house, and so on. Unless you wait to buy your first house until you can afford something expensive, i don't see why you would spend money now that you "might" make in the future.

Re: Subprime mortgages are back

tooleman694 — Tue, 07 May 2013 13:16:12 GMT

You need to take risks in life, this was drilled into my head by my parents when we were buying.

They are millionaires now, so I took their advice and it paid off.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 13:27:24 GMT

Nah, I'd never take a risk with where i'm going to have my family live when there's no upside...perhaps with a job opportunity, investments, etc...but not our home. No point...there's no upside. If you only buy the house you really need...then your'e not giving up anything since more expensive houses will ALWAYS exist.

The definition of a bad bet is taking all the risk, and not gaining much upside. There's no upside there. Bad bet.

As for it paying off for you...well, obviously you had credit issues. THings happen. YOu have to plan for it.

Re: Subprime mortgages are back

tooleman694 — Tue, 07 May 2013 13:47:02 GMT

I had credit issues because I was stupid. I really should have perfect credit right but I was a slacker when it came to credit.

Re: Subprime mortgages are back

Anonymous — Tue, 07 May 2013 14:01:11 GMT

I'm just saying, it's better not to bite off more than you can chew when there will always be opportunities for bigger houses. Obviously, people can make their own decisions based on what works for them.

Re: Subprime mortgages are back

Anonymous — Wed, 08 May 2013 06:03:27 GMT

Thanks jordanmedical for your lovely comments. Foofighter, unfortunately I have to strongly disagree. When banks are irresponsible with lending, everyone pays. Banks truly do not know what's affordable to someone as the person they deem can afford the house, may have problems with not managing their money properly. This is most evident for those with bad credit. The mortgage payment should be capped. As the subprime industry learned in 2008, the higher interest and fees paid for a subprime mortgage to manage risk can easily be offset when a whole bunch of people end up in foreclosure! Banks went under, property values went down for responsible homeowners, and the whole country had to bail the banks out with their tax dollars. It is obvious from this article that the banks haven't learned one thing! It is totally irresponsible to put the full blame on the borrower. High interest on a car loan is different because even with high interest, the payment can be reasonable. Not so with mortgages. When banks raise the interest rates like that, many people will be succumbed to buying a shack for a house in order to be affordable. Many times these borrowers will try to squeeze into something that they can't afford just to keep from downsizing their lifestyle...this is bad. Some banks need to be more responsible! These subprime lenders should be BANNED from selling toxic mortgages to investors and big banks on Wall St. When these toxic mortgages hit big banks that are too big to fail, what happens? Everybody ends up paying to keep them afloat. These subprime lenders should be forced to service all these nasty subprime mortgages IN-HOUSE, that way when things hit the fan, the only ones going down is them due to their stupidity.

Re: Subprime mortgages are back

Anonymous — Wed, 08 May 2013 12:35:07 GMT

@Anonymous wrote:
Many times these borrowers will try to squeeze into something that they can't afford just to keep from downsizing their lifestyle.

Yes, and that's exactly the point - nobody forced them to walk into a bank and try for a loan when they know they dont' have their finances in order and shouldnt' be buying anything at the moment. I don't care what interest rates are being offered...or what payment you're being promised, there is always a downside, and you have to be responsible as an adult - especially when you have a family - and always consider the worst case scenario.

What happens when the interest rate goes up? Can we afford a monthly payment that is $600 more than what we'll pay for the first few years? If we aren't guaranteed to get raises, then perhaps not. There's never a guarantee that you can refinance, so that's not something people should ever base a decision about a loan on.

If people aren't asking themselves those questions, their simply not being responsible and i see no reason to blame it on banks. We need government regulations to protect people from making their own bad decisions now? No thanks. I'm responsible...i can handle it without more government interference.

Re: Subprime mortgages are back

Anonymous — Wed, 08 May 2013 12:35:21 GMT

@Anonymous wrote:
My wife and i are responsible for managing our finances - how much debt we can afford to take on, whether we are paying our bills on time, etc.

If i needed a lending institution to tell me how much of a house payment I can afford, or that I should be "capped" at a certain level...then there's something very wrong. Please remember that the housing crash we saw came from people taking on home loans they couldn't afford - in most cases, because they took an adjustable interest rate and never considered where their payments would be when the time came for the rates to reset. You had a lot of people thinking they could refinance, or they'd get raises, whatever...

But if i was one of those consumers, the first thing i would have done is make sure i could afford the payment under the worst case scenario - and that wasn't done. You want to blame the banks for their predatory lending practice - be my guest...but as a responsible adults, my wife and i believe it's up to us to make sure we can afford what we're buying - otherwise, we don't buy it. There's really nobody else who SHOULD have to shoulder that responsibility. I understand that these organizations went after people and enticed them into loans they couldn't afford - but my thing is, you should already know what you can and cannot afford.

Buying a home is not a right. It's a privilege that you earn. If you haven't earned it yet, don't try and force the issue.