So, if one in five is subprime loans to borrowers with less than perfect credit, then how about the rest? It is estimated that 2 of the remaining 4 are in a category known as non-prime loans. These are the interest only loans, No-income or lower documentation loans, and the very popular optional-payment Negative amortization loans. The default on the non-prime loans is also up substantially; to the point that the Feds and Wall Street are very concerned. Consider this…
Until about 10 to 15 years ago, most homebuyers got a mortgage the old-fashioned way, by going to a bank or savings and loan to apply. Lenders typically wanted 20% of the value of the home as a down payment. People with less than stellar credit often were denied.
Borrowers that didn’t have 20% down had only 2 choices: FHA or VA (HUD) loans, and these had caps in price, income or qualifications.
Beginning in the 1990s, several trends changed that picture. Entrepreneurs saw a niche in serving the so-called subprime and non-prime market of customers who had been denied loans by banks or for whatever reason, couldn’t qualify under the conventional means. At the same time,
lawmakers demanded that banks make credit available to urban and suburban borrowers previously underserved or then unable to obtain the ‘American Dream’.
The Internet also made shopping for a loan easier. And historically low interest rates created a boom in home buying, home-equity loans and refinancing. This boom was as much caused by a strong steady economy as it was, created by the lenders themselves.
Programs were ‘invented’ that would allow borrowers to buy homes that never before could. Thus the subprime and non-prime programs. The mortgage industry is as competitive as any. Those in it often say too much so. With the mortgage borrower ‘pie’ being divided by so many players, the industry had to enlarge the pie. Now with the subprime and non-prime loans, another 30-40% of the public could now be homeowners (whether they should be or not…)
The mortgage industry is not totally at fault. Pressure is unbelievably great from the government and politics and the real estate sales community. In the bigger picture, it appears to be a good thing, right? More homes, more construction, more loans, more people reaching their American Dream of homeownership… all is good, wouldn’t you say?
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