As a community, we need to realise that the borrower has nothing to do with subprime as long as they pay their bills. All that matters is the investor. Whoever has the GOLD is the one who makes the rules. Investors know that if you are always on time with your mortgage payments, you will continue to do so. Even if you're late or behind on something else, you have to pay the house note or you won't have a place to live. Think about how rates for properties where the owner lives are lower than rates for properties where the owner doesn't live, and how down payments and underwriting rules are better for properties where the owner lives than for investment properties. Finance 101!
As we moved into the 21st century, investors had a lot of extra cash, and they are always looking for rates of return that are higher than the market rate. These investors put their money into loan pools because, historically, they have been safe investments, and all of the real estate experts said that real estate prices would keep going up. On the other hand, Congress changed the way interest can be deducted, except for mortgage interest. Americans were trying to live the American dream by using the value of their homes as a credit card. This was a time bomb.
Even though it is kept quiet, the credit repositories were also changing and manipulating their credit models in ways that were good for lenders. I can't give you a rough idea of how many loans were given out with credit scores based on an old FICO model. Back in 1999, I was fighting tooth and nail with wholesale lenders because their credit scores and the reports I got from my credit vendor were very different. I quickly found out that lenders liked to use older credit models, which led to lower credit scores. This meant that they could charge higher interest rates and get higher loan fees and premium yields when they sold loan pools on the secondary market.
When I first started out in the mortgage business, I worked for a large national company for two months. This company had made a software programme that could take any loan and figure out the loan fees for a Section 32 loan. Then, it would change the fees down so that they would show up on the estimated HUD1 just below the Section 32 triggers. Clearly, this is the best kind of loan sharking! We were giving out loans with high interest rates and huge fees to people with bad credit who were in desperate need of cash but had bad credit.
Before saying anything about how we got to where we are now, you need to know a lot of history. It started when the Reagan administration loosened rules on financial institutions and didn't keep a close eye on what these lending institutions did. Can we say savings and loan crisis? Then, to set the fire, a lot of people got into the mortgage business without any training or experience. Their only goal was to make money quickly. Add to that the fact that homeowners were willing to believe anything that sounded good or gave them a short-term break from their financial problems. When your money is funny and your change is weird, you get sick and tired of debt collectors calling you every day to get past-due payments.
No COST, No FEES! The costs and fees are part of the loan and interest rate, so the lender pays them on behalf of the borrower in exchange for a much higher rate of interest. Check your HUD1 for entries that say "Paid outside of closing" or "Paid in full" (POC). Consumers need to know that there are no free lunches, and if something sounds too good to be true, it probably is. Put up your hand! How many loan officers have made loans where the lender got all the benefits and the borrower got none? Yes, the borrower got $25k in cash from the loan, but it cost him/her $17k in equity to do the deal. Sounds quite expensive to me!
Read and understand the small print if you want to borrow money. Don't listen to the advice of a loan officer who wants to earn a commission. Instead, look for trustworthy professionals who have your best interests in mind when they give you advice. Also, don't forget that your home is not your personal credit card that you can use to buy toys or go on expensive trips. It's not part of Money 101 to make claims like that. Marketing will keep you broke, with bad credit, and borrowing money instead of lending it. Money 101 will help you become a lender instead of a borrower.
