Is subprime to blame for the mortgage crisis?

Sometimes the blame for the housing crisis has fallen on President Clinton, who was urged by minority leaders while in office to expand homeownership opportunities. In response, President Clinton urged lenders to offer more flexible loan programs to help minority families, who might otherwise be left out of the dream, have a chance at home ownership.

The guidelines offered by Fannie Mae and Freddie Mac were strict, requiring a 20% down payment; money that most minority families did not have. The lack of a down payment prevented many minority families from achieving their dream of home ownership. As lenders began to relax their guidelines, subprime mortgages began to grow, 500% in just a few years.

Subprime loans offered alternative financing options that had more relaxed underwriting guidelines when it came to credit and income documentation. Until the birth of Subprime Lending, Fannie Mae and Freddie Mac were the two institutions that lent money to banks to help homeowners. However, their guidelines were strict and required a 20% down payment.

Subprime loans also offered alternative income verification, such as bank statements, and many reported income programs for those not in traditional W-2 employee status. The programs that subprime loans offered were necessary to give Americans the opportunity to own a home. Small business owners could finally qualify for mortgages, and people who might have had a few credit hiccups got the chance to own a home.

Consumers flocked to buy homes when lenders offered little to no down payment, creating a frenzy of new, untrained loan officers entering the industry to capitalize on demand for Real Estate. Loan officers were often untrained, or trained to provide consumers with loan programs that were often higher than they would qualify for, with added junk fees and unnecessary prepayment penalties. Many high-risk programs were good for consumers. These were not subprime loans; it was the abuse and stretching of underwriting guidelines that got us in trouble. To top it off, loan officers and brokers placed consumers in exotic mortgages who were given incentives by lenders to do so.

A perfect example is the incentives that Countrywide and other banks gave to loan officers that placed consumers on prepayment penalties on option loans and encouraged them to increase the consumer margin, a key component in the interest rate of the loan. consumer. (loans that adjust monthly and have a negative amortization effect on a mortgage, arm option loans are broken down in the Mortgage Types Chapter). The higher the consumer margin, the more money they will receive from the bank and the higher the prepayment penalty will be. , the more money the lender paid the loan officer or broker

Loan officers were getting up to 4% back on home negative amortization or arm option loans they were selling to customers — that’s $12,000 in repayment fees on a $300,000 loan, not to be confused. with other fees charged in advance. Loan officers and wholesale account executives were given strong incentives to sell adjustable mortgages to consumers. The reason was simple: Adjustable mortgages were more in demand among investors because they anticipated future earnings when the consumer’s lending rate adjusted.

Meaning that if you were paying 7% on a loan over two years, investors expected to be able to make more money on your loan when it settled in 2 years. Little did many investors know that lenders created relaxed guidelines and that consumers could barely afford the payment they initially received, let alone an increase in their mortgage payment that sometimes doubled. Investors did not realize that they may have been buying loans secured by Real Estate, but they were not worth much because the consumers who were responsible for the payments could not afford the mortgages. The increasingly relaxed guidelines increased when President Bush encouraged lenders to take up America’s Homeownership Challenge to get 10 million more minority families into homes by 2010. President Bush made the challenge in 2001. The The reason this challenge was presented was to help save a suffering economy. While 75% more white families owned their homes, only 48% of minority families owned their homes.

To help increase activity in the Real Estate Industry, minority families were the untapped market. For lenders, this became the emerging market and special divisions and programs were established. Some of those divisions, like the BNC Mortgage, once WAMU’s Subprime Arm, used tactics to insure minorities in homes that were less than ethical. The more flexible the programs became, the demand increased, lowering interest rates and increasing property values. This sent Americans refinancing and taking over $2 trillion of equity out of their homes in 3 years or less, during the refinancing boom. Americans have less equity in their homes now than they did in the 1980s. The unfortunate part is that many families who refinanced their homes were placed on exotic type mortgages, which when adjusted or the term is up, would make the mortgage of a consumer is not affordable. This tactic was also used when consumers bought a house.

It was reported that more than $9 billion in hard-earned equity is lost each year due to predatory lending practices prior to the foreclosure crisis. The few billions each year, has now become a global financial crisis. Many families are victims today and still do not realize that they are paying too much on their mortgage. Statistics released by the White House showed that more than 50% of American families were paying a higher interest rate on their mortgage than they qualified for, losing thousands of dollars each year in principal. HMDA statistics showed that the average African American and Hispanic family with good credit scores received a 2-3% higher interest rate on their mortgage than a Caucasian buyer with the same credit.

The United States Home Mortgage Disclosure Act (or HMDA, pronounced HUM-duh) was passed in 1975. It requires financial institutions to maintain and annually disclose data on home purchases, pre-approvals for home purchases, home improvements, homes and refinance applications involving 1-4 units and multi-family homes. On a $300,000 loan, a family paying 2% more would lose $700 per month and pay $300,000 in interest over 30 years.

The collapse of the mortgage industry has closed most subprime lenders and guidelines have tightened; fewer borrowers will qualify, fewer will refinance, and more short sales and foreclosures will take place, affecting the value of surrounding properties. Consumers have less money to spend, all of which further weakens a declining housing market.

We have regressed and it will now be more difficult for the average homeowner to achieve homeownership, affecting those who have already been victimized.

Subprime Lending Expanded The Opportunity For More Families To Become Homeowners, Predator Abuse Is What Caused The Mortgage Crisis.