Tuesday, January 15, 2008

A Sub-Prime Loan -- Whether You Need One or Not

The New York Times ran an interesting article on Baltimore foreclosures today asserting that too many single women were given sub-prime loans and are now facing foreclosure as a result. (This after just last week they blamed the high foreclosure rate on racism.) As I read through the article I was thinking that in many cases this is probably just coincidence, since more single women than single men buy houses for one thing, and for another, single women often have less income than their male counterparts (and less savings as well, especially if they're raising children alone). But this statistic from FHLMC and FNMA gave me pause:

Freddie Mac and Fannie Mae, which buy loans from mortgage lenders, have estimated that 15 percent to 50 percent of the subprime loans they bought in 2005 went to borrowers whose credit scores indicated they were qualified for prime loans.

This reminded me of a person who applied to be a Loan Officer here and was currently working at a sub-prime company. The fees he told us they charge as a matter of course caused our eyes to bulge out of their sockets (and regular, standard mortgage loans that we do here are not “cheap” by anyone’s definition). Now we only try to find a sub-prime lender if we can’t possibly do anything else for a borrower AND they really insist they can’t wait the six months to two years to do what we advise and get their finances in order. But it occurred to me that if any random person, unknowingly, called a sub-prime lender FIRST, they would probably get a sub-prime loan – whether they needed one or not.

In fact, we just received a “thank you” note from a woman we refinanced out of a negative-amortization, adjustable rate loan that she took out last year. Her credit scores weren’t the greatest and she doesn’t have a lot of income, but if we were able to get her conventional, fixed financing last month, there’s no reason someone shouldn’t have been able to do it for her a year ago. It’s just so important to know who you’re talking to or to verify what you’re being told, particularly if you’re not educated on what is common and normal for the mortgage lending industry.

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