Sub-Prime Loans

[Mr.Network]

Obviously, the real estate markets and financial institutions are reeling from the woes of the sub-prime lending market. I constantly hear/read stories about people who are going to lose their homes because an unscrupulous mortgage lender put them in the wrong type of loan.

 

The truth is that those people are homeowners only because of those relaxed-standards loans. The nasty reality is that they are going to lose a home that they probably shouldn't have bought anyway and that they put little or no money into. They bought it with the Lender's money and they can't afford to pay it back, what else can happen other than losing the house?

 

This story in today's Wall Street Journal is yet another example:

 

http://online.wsj.com/article/SB118722072707499017.html?mod=hpp_us_pageone

 

Consider this scenario:

 

Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then "reset" to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.

 

With a December "reset" on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses' loan balance may exceed the value of their home.

 

Now, they are blaming the mortgage broker but two years ago he put them in an affordable loan, that required little down payment when this was the only possible way that they could buy the house they are living in.

 

Looking back on it, had they been more pragmatic and said, "We may not have any equity in two years when we have to refinance, so maybe we should buy a cheaper house or continue to rent and save a more sizeable down payment." If they had done that, they wouldn't have the house they are in now. They wanted it all and their sub-prime loan gave them the chance to chase the American Dream

 

I don't see how sub-prime lending is to blame for this. They are to blame. They reached for a brass ring that was a little out of their reach and now they are going to fall. Their fault, period. IMHO.

[leatherneck]

Obviously, the real estate markets and financial institutions are reeling from the woes of the sub-prime lending market. I constantly hear/read stories about people who are going to lose their homes because an unscrupulous mortgage lender put them in the wrong type of loan.

 

The truth is that those people are homeowners only because of those relaxed-standards loans. The nasty reality is that they are going to lose a home that they probably shouldn't have bought anyway and that they put little or no money into. They bought it with the Lender's money and they can't afford to pay it back, what else can happen other than losing the house?

 

This story in today's Wall Street Journal is yet another example:

 

http://online.wsj.com/article/SB118722072707499017.html?mod=hpp_us_pageone

 

Consider this scenario:

 

 

 

Now, they are blaming the mortgage broker but two years ago he put them in an affordable loan, that required little down payment when this was the only possible way that they could buy the house they are living in.

 

Looking back on it, had they been more pragmatic and said, "We may not have any equity in two years when we have to refinance, so maybe we should buy a cheaper house or continue to rent and save a more sizeable down payment." If they had done that, they wouldn't have the house they are in now. They wanted it all and their sub-prime loan gave them the chance to chase the American Dream

 

I don't see how sub-prime lending is to blame for this. They are to blame. They reached for a brass ring that was a little out of their reach and now they are going to fall. Their fault, period. IMHO.

 

 

I feel the exact same way. I'm sorry that this will come across as harsh, but if you do stupid things, stupid things happen to you. And buying a home and counting on being able to refinance it in two years (even when told so by a mortgage broker) is pretty stupid to me. Banks are in the business to lend money and look out after only their own interests; not their borrowers.

[Booge]

The mortgage companies did stupid things too, that's why many are failing. There are laws against predatory lending, which were broken in many instances. It goes both ways. If the banks are indeed looking after only their own interests (and of course they are), why did they make so many bad loans that had to fail if (when) interest rates went up? In a word, overzealous, and in some cases, unscrupulous.

[Hasbeen]

The mortgage companies did stupid things too, that's why many are failing. There are laws against predatory lending, which were broken in many instances. It goes both ways. If the banks are indeed looking after only their own interests (and of course they are), why did they make so many bad loans that had to fail if (when) interest rates went up? In a word, overzealous, and in some cases, unscrupulous.

 

 

Agree, it's a two way street. Risk taking by the buyer but also the lender. Seller seems to have come out good, though.

[HHSDad]

Mr. Network and LN. You are both uniquely qualified to read through the mass of forms that come with a new mortgage. Most people aren't that knowledgeable and must rely on an honest mortgage broker to do what's best for the client. Terms are often complicated, especially when the mortgage guy is throwing a hundred different things at the customer and telling them that everything is fine.

 

I would encourage anyone that doesn't understand what their signing to take it home with them and have a third party go over the loan paperwork with them. An attorney may be a bit expensive, but when you're talking about losing hundreds of thousands of dollars and/or your home, its not a bad investment. People who want to own a home should educate themselves as much as possible, but they shouldn't be precluded from owning a home because they aren't financially literate.

[leatherneck]

The mortgage companies did stupid things too, that's why many are failing. There are laws against predatory lending, which were broken in many instances. It goes both ways. If the banks are indeed looking after only their own interests (and of course they are), why did they make so many bad loans that had to fail if (when) interest rates went up? In a word, overzealous, and in some cases, unscrupulous.

 

If course they did stupid things and they have no one to blame for their own troubles than themselves.

 

I just don't like the tone from that article that seems to indicate that the Montes are blaming someone other than themselves for the mess they are in. They combined earn $90,000 but bought a home for $567,000. Talk about getting stretched too thin. That's plain stupid. And then they were upset when they learned that if they could have refi'd, they'd would have had to pay a $12,000 prepayment premium or penalty. They said that wasn't made clear to them when they took out the loans. Did they not read the loan documents they signed? Did they not have an attorney review the documents for them? If you can't afford an attorney to review loan documents, then you can't afford the loan.

 

They should work out a plan with their lender to sell the home at a loss; see if their lender will take a partial haircut and accept a plan for the remaining amount due; go rent an apartment and make payments on the balance due. Most lenders don't want to go through foreclosure proceedings, because they still get stuck with the house that they'll end up selling for a loss on the market anyways.

 

What these folks did was just dumb and it really bothers me that some members of Congress want to use my tax dollars to bail people like this out. That's also stupid. If people feel sorry for folks like the Montes, great. Send them your money. Don't send them my tax dollars.

 

I do feel a little better now. Just in time for a closing representing responsible people borrowing money from a responsible bank.

[Booge]

If course they did stupid things and they have no one to blame for their own troubles than themselves.

 

I just don't like the tone from that article that seems to indicate that the Montes are blaming someone other than themselves for the mess they are in. They combined earn $90,000 but bought a home for $567,000. Talk about getting stretched too thin. That's plain stupid. And then they were upset when they learned that if they could have refi'd, they'd would have had to pay a $12,000 prepayment premium or penalty. They said that wasn't made clear to them when they took out the loans. Did they not read the loan documents they signed? Did they not have an attorney review the documents for them? If you can't afford an attorney to review loan documents, then you can't afford the loan.

 

They should work out a plan with their lender to sell the home at a loss; see if their lender will take a partial haircut and accept a plan for the remaining amount due; go rent an apartment and make payments on the balance due. Most lenders don't want to go through foreclosure proceedings, because they still get stuck with the house that they'll end up selling for a loss on the market anyways.

 

What these folks did was just dumb and it really bothers me that some members of Congress want to use my tax dollars to bail people like this out. That's also stupid. If people feel sorry for folks like the Montes, great. Send them your money. Don't send them my tax dollars.

 

I do feel a little better now. Just in time for a closing representing responsible people borrowing money from a responsible bank.

 

I agree with you 100%. But the bank was just as stupid as the debtor...the loan never should have been made in the first place. So both parties are costing us money. And like I said, a lot of borrowers never dreamed this could happen to them, and the lenders did a poor job of pointing it out to them (or assured them it would be okay, like in this instance.)

[Qryche11]

I am in the business, I work for the 8th largest bank in the country and we are extremely conservative when it comes to lending to Sub-Prime borrowers. We provide an excellent product to folks who may have had issues in the past due to sickness/divorce/death in family/loss of job as well as Self Employed borrowers, who cant seem to understand why they end up in my division although they want to write off all of their expenses to show Uncle Sam they only make $10,000 a year. I know... run on sentence, but I digress.

 

Many mortgage brokers are very qualified and do a great job but there are some shady ones out there as well and they give that sector a bad name. These are the ones that hide rate bumps in margins on 2/28 and 3/27 ARMS, the ones that hide fees until closing day, etc. There are also very uneducated borrowers out there, trust me I talk to them everyday. To be honest, it is and it isnt their fault that they are not bright. My job is to not only educate my borrowers but to also look out for their best interest. My employer has branches all over the country with emphasis in the West/Midwest. There are predatory lending laws in different states and some specific states will not even allow us to do "Stated Income" loans for Self Employed folks. Compliance is a HUGE word here at our bank and as much as we want to close every loan that comes across the system, many we have to turndown.

 

I cant tell you how many customers I have refinanced in the last 12 months who came to us and said, the broker told me I could refinance in 2 yrs and my rate is going to adjust to 11% if I don't. We have cried over this and its tearing our family apart. They have a $500,000 house and they owe $450,000. They may have combined income of $75,000 and yes, they are in their 50's. The broker didnt care, he wanted the commission but I myself would not sell this product to this type of borrower. If they show the propensity to pay and it is within a viable debt ratio then I sell it, but if there is any adjustment period and I know it will put them in a bind I don't.

 

The Sub Prime market is hurting now because many secondary lenders cant sell their loans because many are defaulting. We portfolio 80% of our loans here and sell 20% as of today. I am sure when the market corrects we will go back to selling 70% and keeping 30% because that is the most profitable option for our bank. The good news is we can do this restructuring and support it. The smaller lenders and the New Centurys, Accredited, American Home Mtg, etc they couldnt hold those in a portfolio and ride it out so they bolted their doors and told everyone thanks for playing.

 

To borrowers out there, I urge you to have someone read over your docs during the 3 day recision period and if its a purchase, have an attorney read over the docs prior to you closing. Or if you are a scholar like LN go ahead and read them thoroughly and make sure you understand everything.

 

Here is the latest on Countrywide who is probably the largest residential lender in the company. Can you say..... SELL SELL SELL ????

 

http://money.cnn.com/2007/08/16/news/companies/countrywide/index.htm#Mozilo

 

Talk about jumping off the ship. We are holding strong here because of our conservative lending guidelines, excellent staff of lenders and because we can house our own loans and ride out the bad times.

[Ram]

I agree with you 100%. But the bank was just as stupid as the debtor...the loan never should have been made in the first place. So both parties are costing us money. And like I said, a lot of borrowers never dreamed this could happen to them, and the lenders did a poor job of pointing it out to them (or assured them it would be okay, like in this instance.)

 

I agree that the loan should have never been made. But, I also agree with leatherneck, the buck stops with the borrower. I have had loan officers tell me that they could loan me up to "X" amount of dollars, and I knew that I could only pay, say, $200 a month, but "X" would have cost me $400 a month. I knew that I would not be able to play that amount in a monthly payment. Now, If I agreed to a loan for "X" and could not make that payment, who is to blame? Me. I knew that I could only pay $200 a month, but I got a loan that would cost me $400 a month.

 

The bottom line is people need to live with in their income, not try to get by with living in a higher income bracket. I know people who make less money then I do, but have a more expensive home then I do, and two more expensive vehicles then I do. I know what I have left after the bills are paid, and I know they must be in financial trouble, because I know that I could not pay their bills and they make less money then I do.

 

Personally, I think this is their mistake and now they are going to have trouble for their mistake.

[rockmom]

I don't own a home, because I'd have had to be one of the "sub-prime" borrowers. Everytime I investigated the possiblity, the "ifs" of the mortgage scared me and I decided to wait until I could come up with more money, and improve my credit rating. I don't understand why people would choose to first, buy a home they wouldn't be able to afford even under ideal conditions; and second, why they would sign for a mortgage knowing that in a few years it could have adverse affects on their situation. I know many may have been desperate for either money or to buy a home, or simply not savvy enough to know how to investigate. But there seems to be a huge number of those people.

 

Maybe I'm just a scardy cat, but I couldn't do it.

 

As to the sub-prime lenders who were unscrupulous, it's a shame they may be bailed out. I think the industry would be better of letting them fail, and letting the more responsible lenders retain their credibility.

[Qryche11]

I agree that the loan should have never been made. But, I also agree with leatherneck, the buck stops with the borrower. I have had loan officers tell me that they could loan me up to "X" amount of dollars, and I knew that I could only pay, say, $200 a month, but "X" would have cost me $400 a month. I knew that I would not be able to play that amount in a monthly payment. Now, If I agreed to a loan for "X" and could not make that payment, who is to blame? Me. I knew that I could only pay $200 a month, but I got a loan that would cost me $400 a month.

 

The bottom line is people need to live with in their income, not try to get by with living in a higher income bracket. I know people who make less money then I do, but have a more expensive home then I do, and two more expensive vehicles then I do. I know what I have left after the bills are paid, and I know they must be in financial trouble, because I know that I could not pay their bills and they make less money then I do.

 

Personally, I think this is their mistake and now they are going to have trouble for their mistake.

 

Great points you make. A wise man once told me... .its not about how much you make each month or year its how much you keep.

 

If you are sitting in a $500,000 house and have have your 32 inch television on top of a microwave stand, two pieces of furniture in the living room, peanut butter and jelly in the fridge and you cant hardly do anything because your disposable income is $200 a month, you are HOUSE POOR.

 

Live within your means, enjoy life, save your money and donate your time to a good charitable cause.

[Hasbeen]

May be a dumb question but I've always wondered. If an S&L failed and closed the doors, what happens to outstanding mortgages? Some federal branch collect them?

[Booge]

I agree that the loan should have never been made. But, I also agree with leatherneck, the buck stops with the borrower. I have had loan officers tell me that they could loan me up to "X" amount of dollars, and I knew that I could only pay, say, $200 a month, but "X" would have cost me $400 a month. I knew that I would not be able to play that amount in a monthly payment. Now, If I agreed to a loan for "X" and could not make that payment, who is to blame? Me. I knew that I could only pay $200 a month, but I got a loan that would cost me $400 a month.

 

The bottom line is people need to live with in their income, not try to get by with living in a higher income bracket. I know people who make less money then I do, but have a more expensive home then I do, and two more expensive vehicles then I do. I know what I have left after the bills are paid, and I know they must be in financial trouble, because I know that I could not pay their bills and they make less money then I do.

 

Personally, I think this is their mistake and now they are going to have trouble for their mistake.

 

And the bank is going to have trouble for their mistake. I agree with all of you that ultimately the borrower must live within his means. I also know that many people never dreamed their mortgage payments would be several hundred dollars more after a couple years. Most people are living beyond their means. I understand that, and it's not a new phenomenon...

 

Also, very good posts by qryche11...top notch all the way.:thumb:

[Ram]

Great points you make. A wise man once told me... .its not about how much you make each month or year its how much you keep.

 

If you are sitting in a $500,000 house and have have your 32 inch television on top of a microwave stand, two pieces of furniture in the living room, peanut butter and jelly in the fridge and you cant hardly do anything because your disposable income is $200 a month, you are HOUSE POOR.

 

Live within your means, enjoy life, save your money and donate your time to a good charitable cause.

 

Exactly, if you have the income for a $200k house, then live in a $200K house and have all the other things that life has to offer. Don't try to live in a $500K house, and get mad because someone else makes more money then you.

 

If you have an income that will support a $500K house, more power to you.

[HHSDad]

May be a dumb question but I've always wondered. If an S&L failed and closed the doors, what happens to outstanding mortgages? Some federal branch collect them?

They would be sold to another financial institution during the bankruptcy.