“Waiter, I’ll have a sub-prime steak; make it medium-rare”. Order with those words and your waiter will check you for two heads. If you eat meat, you want the prime-cuts. In fact, no one wants sub-par unless you’re playing golf.
So what motivates mortgage loan officers toward sub-prime lenders? Money of course! Typical capital formula: the greater the risk the greater the return.
Mortgage lenders weigh risk, return, and value. They risk loaning money that may or may not get repaid. They risk loaning money at a rate that falls well below fluctuating interest rates over 30 years. They risk loaning money on real estate properties that lose value.
High risk loans recommend high rewards. Commissions are issued and the home buyer or refinance candidate gets or keeps their home.
Suspicious lending practices put the buyer at risk. The loan document may bury the facts. “Just sign here. You can move into your new house next Monday.” No reason to heed “truth-in-lending”; get the sale, “seal the deal” because the borrower pays no matter what.
Predatory lending practices bring further harm to families hoping to fulfill their dream of home ownership. Families with poor credit histories suffer further economic and social stigma. Maybe they should know better, but who will tell them?
According to “Inside Mortgage Finance”, sub-prime mortgage originations have increased 10 fold since 1997. During 2006 & 2007, 25% of all mortgage originations were sub-prime.
Subprime usually means that a loan is approved for borrowers with “tarnished credit profiles”.
As you know from “Have you checked your credit score” advertisements, FICO (credit scoring system developed by Fair Isaac & Co.)scores guide loan officers when assessing a borrowers creditworthiness. Like the Scholastic Aptitude Test, the higher the score, the better (850 tops; 300 not so good). Subprime loans are approved for borrowers with FICO scores at or below 600.
Families lacking financial resources wanting a home are easily enticed by the sub prime lender. It all starts with a phone call by savvy telemarketers promising loan approvals on a $400,000 house in East Flatbush (Brooklyn, NY) to a bus driver. A non-profit organization study indicates that just about 50% of the loans in East Flatbush are sub-prime.
Karl Dorismund said, “From the beginning they (the lender) tell me the mortgage will be $2,000 or 2,100 a month. Can you believe how much it is? $2,900!”
Mr. Dorismund signed a high-interest mortgage with no-money down. In my Town (Essex, MA), 10% to 20% is necessary before a loan is approved.
Cathy Mickens, an advisor to first time home buyers says, “On any one block, we might see…three or four for sale signs….we didn’t see this last year at this time.”
A study by a New York non-profit reveals that the loan patterns for poor and minority neighborhoods. has the highest concentration of sub-prime loans with the highest level of defaults. Borrowers bailout.
Sub prime lenders don’t like moral solutions. It is immoral to entice borrowers with light burdens at first only to break their backs later. It’s all in the small print, and the details seldom are mentioned to the sub prime borrower.
Subprime lenders made $587 billion in new mortgages in 2004, up from $390 billion in 2003, according to National Mortgage News.
Mortgage marketing by sub prime lenders reminds capital markets that the less-educated city dweller gets trapped by socio-ecocnomic limitations. Less fortunate people need helping hands. This does not mean setting them up for failure; this means creating opportunity.
Habitat For Humanity affiliates provide volunteer labor, money and building materials to construct “decent houses” for the sub prime borrower. Homeowner’s make a small downpayment, and must pay a reasonable mortgage. “Habitat houses are sold to partner families at no profit and financed with affordable loans.”
Every Habitat For Humanity home-owner is a sub-prime borrower. In fact, many would not qualify for loans from a bank or mortgage company.
Habitat for Humanity works to eliminate substandard housing
Habitat works to provide homes for families living in sub-standard apartments.
Habitat has provided homes for more than 1 million people in 3,000 communities
Habitat for Humanity (and organizations like it) offers a key to one family at a time. Your donation to Habitat for Humanity gives hope to qualified and committed sub prime borrowers.