Safer subprime means no loan lockout
It's a free country, right? Not so much if you have really cruddy credit or spotty income. It doesn't matter if you can put 50% down or you own your home free and clear but want to unleash some equity in the case of a refinance.
Subprime, nonprime and stated loans are industry terms for borrowers on the outside, not able to qualify for standard mortgages. Examples of outsiders are those with serious credit marks like recent foreclosures and bankruptcies, credit scores under 620, and unstable or irregular income as defined by Fannie Mae or the Federal Housing Administration.
Some of the nasty, deceptive features that accompanied subprime loans were balloon payments, prepayment penalties, rocketing rates after lulling you into accepting the loan through a low starting payment, interest-only payments that caused payment shock after a few years and a predatory amount of upfront points and fees.
If your only hope is qualifying for a subprime loan, the Federal Reserve effectively gave you a scarlet letter seven years ago when it changed the Truth in Lending Act in 2008 requiring a reasonable determination of a borrower's ability to repay. Provisions in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act sealed the deal by empowering the Consumer Financial Protection Bureau to launch the 2014 ability-to-repay rule that puts even more limitations on lenders wanting to lend to you. Good-bye subprime and good-bye stated loans.
Most people have a good sense of their ability to budget for housing expense even if it's a higher payment due to difficult credit issues. Absent unforeseen events like a layoff or a serious health issue, most borrowers will responsibly cover the monthly cost.
Consider regulatory and legislative reasoning. "The degree to which freedom must be impaired to protect you from yourself," said Jack Konyk, executive director, government affairs of Washington, D.C.-based Weiner Brodsky Kider when asked his thoughts on the clamped down qualifying rules.
About 20% of all new U.S. mortgages were considered sub-prime in 2006. The market had grown to 1.3 trillion dollars of subprime loans being serviced at that time. And, of course, the mortgage crash landed in 2007. Incensed, embarrassed and possibly panicked U.S. authorities effectively banned subprime loans through an impenetrable set of rules.
"The pendulum has swing too far the other way. It's too difficult for creditworthy borrowers to get a loan," said Don Lampe, law partner at Morrison Foerster.
Lampe points out that it's been one year since the ability to repay rules went into effect. He calls for a data-driven policy discussion to figure out the tweaks and adjustment necessary to see if families can benefit from these other loans.
Like beauty, risk is in the eyes of the beholder. FHA takes credit scores as low as 500 and 10% down or 580 and 3.5% down. Fannie Mae just announced they are back in the 3% down payment business with a 620 credit score, with at least one (no mortgage experience) first-time buyer on the loan is a must.
Subprime lending went from 20% market share to zero overnight. If policy makers reinvent subprime loans to be safer, requiring at least 30% down or 30% equity using only a fully amortizing fixed rate term that is certainly a higher priced loan (to account for any investor risk of less credit worthy borrowers), but with no exotic gotcha features that can blindside borrowers, we'll stop punishing today's locked out, imperfect borrowers for the sins of our industry's past.
Mortgage Broker Jeff Lazerson is president of California-based Mortgage Grader. He has 28 years of origination experience. Contact him at : jlazerson@mortgagegrader.com