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Subprime Revealed - Tales of an Industry in Crisis
Recently, I dropped by to see how he was doing, and found him in dreadful condition.
A ventilator kept him breathing, but his eyes were unseeing. His once-fit body was prone, his legs amputated at the knees, his arms removed above the elbows. A most horrible rasping noise came from his chest, and the sight of him filled me with dread.
As I watched from the edge of the room, the hubbub in Intensive Care escalated. Doctors and nurses stepped aside as three hospital administrators came to get a first-hand look at the famous patient.
Mr. Larry took one look at Phine Ants, snapped his fingers, and said, “I know what he needs. He needs some new feet. We have that improved prosthetic Feet Have Ankles program (“FHA”) available, right? Get the man some new feet.”
One of the nurses murmured, “Sir, with due respect, the FHA prosthetic program is only available to patients who have their original feet attached and can walk a mile barefoot over hot coals.”
Ignoring this comment, Mr. Curly spoke next. “You know, from all accounts, this patient is extremely dangerous. I would highly suggest that his ankles and wrists be shackled to the bed frame. I do insist that these new Intensive Care Kvetchings (“ICK”) be complied with, so that he doesn’t do anyone further harm.”
Mr. Moe slapped Larry and Curly upside their heads. “You are not seeing the big picture here,” Moe said. “What we really need to do is give a tax break to the undertakerhe’s the one who’s going to haul this corpse out of here, he might as well profit. It’s the American Way!”
Two-Year and Three-Year Adjustable Rate Mortgages (“ARMs”)
Of course, the media is wholeheartedly clueless as to why so many people are losing their homes. It is not that their subprime mortgage payment has increased. People are losing their homes because the wholesale lenders that could have refinanced them out of the subprime loansand the programs that existed to transition people into more stable loansare gone!!!
Two-year and three-year ARMs were meant to be short-term bandages, to give credit-challenged individuals an opportunity to get their foot in the door of their new home, clean up their credit, refinance, and go forward. These types of loans had previously been offered at decent starting interest rates to credit-challenged peopleoffering them the opportunity of home ownership. The prepayment penalty on these loans was compensation to the lender in the event people got out of the loans quicklybecause if a borrower is in and out of a mortgage within a couple of years, the lender loses money. In addition, it was a concession given to the lender by the borrower because the lender was willing to give the benefit of the doubt, and the opportunity, to the person with challenged creditsomething that mainstream financing was unwilling to do. After two or three years, having remedied the financial issues which had previously prevented the home buyer from obtaining a conventional mortgage, a person would be allowed, encouraged, and assisted in refinancing into a long-term, fixed-rate, stable mortgage.
Subprime/Nonprime Another View
KK The Lawyer. I put my best friend into a nonprime loan on her primary residence. She has great credit, and she’s my best bud! Why would I do such a thing?
KK’s home is out in the boonies on almost 80 acres. In order to refinance her home, she needed an appraisal of comparable-sized properties. There were none. Her home did not qualify as a farm. Her loan amount was too small for a “hobby farm” loan. Her property did not meet mainstream lenders’ criteria.
She needed 85% loan-to-value, on a stated loanmeaning, income is stated but not proven. This type of loan has often been used for (usually self-employed) people who write off everything on their tax returns, which then show minimal income for tax purposes; hence, the tax returns are not used and the loan type is called stated. Her loan-to-value and “stated” income loan type did not meet mainstream lenders’ criteria.
Ultimately, I found exactly one lender willing to refinance my friend’s property. She refinanced to a 15-year fixed nonprime loan. She consolidated debt, and substantially lowered her overall monthly payments. She deducts the mortgage interest on her tax returns. A nonprime loana good outcome indeed!
BB The Executive. BB had previously lost a home to foreclosure, due to health issues. Once she regained her health, and her livelihood, she realized that due to the foreclosure, she did not qualify to buy another home through mainstream financing.
She purchased her new home with a two-year subprime ARM. She kept her mortgage payments on time for two years, and then I attempted to get her a conventional refinance.
It did not work. Although her mortgage payment history was perfect, not enough years had passed since the former foreclosure to meet conventional financing requirements.
I refinanced her into another nonprime loanthis time, a 30-year fixed loan, not an adjustable. Interestingly, because the subprime loan had no mortgage insurance requirement, although her interest rate was higher than it would have been with a conventional loan, her payments with the nonprime, interest-only loan were lower. The subprime loan stabilized BB’s finances long-term, and she was satisfied. Another great solution!
DD The Professor. The professor had excellent credit. Then he went to the movies. He left his backpack, with his ID and checkbook, in his car. Having made it easy for the thieves, the professor became a victim of identity theft. The thieves went shopping with the professor’s checkbook. Although he closed his bank accounts, the bounced checks wound up as collections on his credit report.
The professor decided not to pay off the collectionswhich had trashed his credit scorebecause they weren’t his. He also decided not to fill out the paperwork and fight the matter with the credit bureausbecause the police had told him that the thieves could simply reprint and use more of his checks, and he’d have to fight this battle potentially forever.
When he bought his house, the professor was not a candidate for conventional financing because of the messed-up credit. He qualified for a 30-year fixed, subprime loan. He paid a bit more in the interest rate, but not terribly much. He just wanted to get into his new home, and he was happy with the result!
You get the picture. The subprime industry was not necessarily the Devil Incarnate. It doesn’t matter anymore, though. Over 250 major wholesale mortgage lenders are gone, caput, finito, terminado, finished, done, history. And the damage is spreading. Not only have these nonprime lenders disappeared, but now …. Alt-A.
Right now you’re thinking, how can people not be able to document their income? Here’s the deal. Many people work for tipsnot paychecks. Or rent out rooms for income. Or sell their art, or handmade items. Or work under-the-table.
Many people are self-employed, but haven’t been in their line of work for two yearsa requirement for qualifying for a mainstream home loan.
Many people have been in their line of work for two years, but never took out a business license or had a CPA prepare their tax returnsconditions that lenders require to ‘prove’ employment if a person can’t produce their financial records.
Many people are not filing tax returns, for the simple reason that they don’t support King George and The War. Many people write off so many deductions on their tax returns that on paper, it looks like they don’t have income.
Yet all these people may have perfect credit, and would be quite capable of making their mortgage paymentsthat is, if the mortgage programs still existed.
But for the most part, they don’t.
To qualify for one of the remaining finance programs, expect to be in a position where you really don’t need a loan. Your ducks should not only be in a row as you begin the mortgage application process; your ducks should be tap-dancing in-sync on stormy seas.
A Few Suggestions to the Powers That Be to Fix The Mortgage Mess
1. Allow streamline refinancing without requalifying for those who have solid mortgage payment history. In other words, people with good payment history should be allowed to lower and fix their interest rate without having to requalify.
2. Pay the loan officer a livable salary and benefits. Loan officers usually work for free. No salary, no benefits. In Oregon, while companies may pay loan officers a minimum wage, that is often considered an advance on commissions, and is repaid to the employer by deducting it from the loan officer’s commissions when a loan closes. Of course, there are those Craigslist ads offering a loan officer $10-$14 per hour. Good luck servicing your own home loan with a salary like that.
Do you want someone who is working for an unlivable wage handling what may be the most important financial investment of your life? If loan officers were compensated, as other profes-sionals are, the potential for abuse would substantially diminish.
(As a side note, legislation has been proposed that, if passed, would make loan officers personally liable if their clients default on their mortgages. What a great way to drive loan officers out of the business! Which of the Three Stooges thought up that idea?)
3. Fix the money system. We are in the current mortgage meltdown because the money system is brokenand has been, for quite a while.
In the “Roaring ‘20’s,” credit was cheap and easy. Then the money spigot was turned off, and The Great Depression ensued. Congressional hearings in the 1930’s showed that this happened not by accident, but by design. Safeguards were created and put into place.
If we really want things to change, the money system must be fixed.
Fixing requires educatingourselves, our families, our friends, and our communities.
The Media does not supply educationas you know, it supplies A-Day-In-The Life-Of-Brittney-Spears mind drivel.
If you want educationknowledge, and ultimately, freedomfor starters, check out Aaron Russo’s America: Freedom to Fascism to understand what’s really happening. See http://www.freedomtofascism.com/downloads/dvd.php and order the DVD.
For background on the process that enables wealth to be transferred from the have-little’s to the have-a-lot’s, check out http://www.themoneymasters.com/synopsis.htm and order that DVD also.
Read The August Review at http://www.augustreview.com/about_us/ for an uncommon understanding of global events. Then check out the insights of Henry C. K. Liu at http://www.henryckliu.com/.
And if you haven’t yet personally dealt with the reality of the peak oil situation, do a Google search for peak oil and start reading. This is most important.
Phine Ants will not rise from the dead. May we all be there for each other as the cards continue to fall.
With thanks to Roberta Kelly for educating me.
Miriam is a home loan specialist dedicated to helping people get their ducks to tap dance on the stormy seas of today’s mortgage environment. She can be reached after hours at 503.348.2394. She can also be emailed at: firstname.lastname@example.org
Site updated Fall 09