Is subprime lending destroying America?

Question

If subprime lending allowed people, who had no means otherwise to buy a home, to buy houses and is now forcing them to foreclose, then were these people doomed to never be able to own a home?

Answer 1

I think the subprime lending caused the run-up in housing prices. I've heard that subprime lenders increased the total number of people able to buy a home by 20%. So what happens when 20% more people are bidding on the same supply of homes? Prices go crazy.

Yes, a small percentage of subprime borrowers are now on the rocks. That was expected. They knew that would happen when they wrote the loans. (and let's face it, subprime borrowers knew they were stretching, knew their "teaser rates" would go up substantially, so they're not innocent either.) However most subprime borrowers have knuckled down, earned the extra money and kept up.

What subprime lending did was make homes less affordable for EVERYONE. And made traditional fixed-rate borrowing obsolete. Imagine you're trying to buy a house with conventional financing that's within your means... you are bidding against a guy armed with a 1.99% teaser rate ARM, who knows in 3 years he'll be working 2 jobs to pay that mortgage. Plain and simple, you've been outbid! He wants that house more than you. Now imagine that happens with every single house you look at :(

In the city of San Francisco, something like 90% of the loans were interest-only, neg-am or some goofy subprime setup. Those are the buyers winning bids and setting price expectations for sellers. How, in that market, do you buy conventionally!? (you don't.)

So in some markets, the people who will not stoop to dicey subprime borrowing are the people who are doomed not to own homes.

Answer 2

No, subprime is not destroying America. It's actually very worthwhile and economically important.

The concept of subprime mortgages is that a lending instiution knows that these borrowers are higher risk so a higher interest rate is charged. Yes, the default rates on these types of loans is higher but the idea is that by charging higher interest rates to the entire pool of borrowers, the bank can still turn a profit even when there are defaults.

Home ownership is one of the greatest investment you can make in the US. Some people say it is the best. By helping some people secure a mortgage who would not normally be able to get one from a bank, subprime helps people make this important investment.

Also, subprime does not necessarily mean bad credit. No income verification mortgages are also subprime. Some people would rather not open their books to a bank and are willing to pay points on a mortgage to avoid a bank's due process.

The problem with subprimes earlier this month is that it became apparent how lax some subprime mortgage issuers were in their dealings. It is a fact that the interest rate they charge their customers should compensate for the added risk they are taking in loaning money to less credit worthy people. But these places were all reporting massive losses. It turns out that the subprime lenders were literally throwing money at anyone who would ask for it and were barely checking their applicants. Moreover, the subprime lenders created products that would enable people to buy a home with barely any cash down. That worked fine so long as the value of a person's home kept increasing. Unfortunately financial gravity crept in and the value of many people's homes fell as housing slowed down. Suddenly many subprime borrowers couldnt make their payments and the whole thing ballooned.

For now, after an initial panic, it seems that the subprime mess is contained and has not spread to higher quality borrowers. And the Fed seems ready to act. That's good.

The subprime mess is reminiscent of the tech stock mania of the late 90s. Every broker was willing to give margin loans to anyone asking for it. And it worked well so long as the stock market kept climbing. Once the market started to swoon, the forced selling started as margin calls came in. Selling begets more selling and you know how that story ended. Nasdaq is still a long way away from its all time highs.

That is what people are worried about with the subprime mess. If literally thousands of homes came on the market simultaneously then the value of everyone's home will go down causing serious damage to the economy. It doesnt look like that is happening now though.

Answer 3

I disagree for several reasons, subprime loans arent the real culprit as they were a product created to serve a niche market. Many jumbo loans and perfect credit type loans are also defaulting. Sub prime is just the easy buzzword in the papers these days. I have originated mortgages for all types of borrowers and nobody that cannot afford a home gets approved by underwriters if the loan application is truthful. There are companies out there selling fake pay stubs that have been caught that are also to blame in this. This recent hyped market lured many into an equity grab or conversion of bills into a lower payment. Conversion of unsecured debt into a house payment is never a good idea. Loan officers have taken greed to an unprecedented level and they are also to blame. I have witnessed in many loan offices when working as a loan rep the rampant fraud and acts of total disregard of their clients best interests comitted by these people. The typical borrower has been lured into hybrid loans to save money for a while and then refinance later again to fix a bad previous repair of their situation. Credit companies have raped the masses and sub prime lending has became the scapegoat. Some defaulting homeowners should never have been able to become a homeowner at all. That fact does not exist solely in the sub prime arena. Stated loans, option arms, and interest only arms of all types are ticking time bombs for people with poor financial skills. Many loan officers these days only care about their rebate and origination fees. They see a 2-28 loan as a customer that will be back in 23 months. The same client would have potentially gotten a 30 year fixed rate for almost the same monthly payment. Some sub prime loans are bad but the abuse of clients across the board is and will remain a much larger problem. In close to 30 years I have sold and or financed over 1,000 properties and not a single person I have worked with has went into default or lost their home.
I have also saved hundreds from losing their home while in foreclosure and do that for no charge. In nearly every instance the homeowner was upsold by a real estate agent and sent to the agents buddy in mortgage lending. Greed and client abuse by unethical loan officers and unethical real estate agents are the true destroyers of many homeowners dreams. Some people are just working the system and are deadbeats but they are often weeded out by good LO's. Some will lose their home no matter who they worked with because of some other financial calamity. The best fix for this mess will be to go back to the guidelines used in the mid 90's and stop allowing stated and option arms. I'm sure this will get slammed on by many lenders but it is the harsh truth.

Answer 4

We've heard alot about affordable housing. Well the sub prime market provided a way in for alot of folks. Unfortunately, those folks are sometimes not good money managers and so, we have the situation now of foreclosures. It's sad. For most, the alternative is FHA financing and those guidelines can be restricting. I'm finding alot of folks who were border line to begin with took loans for interest only and now can't sell because the loan amount is more than the market will bear. Hence, another reason for large numbers of foreclosures. As a Realtor and Appraiser, this is one of the toughest markets I've seen in my 20 years in the business.

Answer 5

Home ownership is not for everyone, and we've tried to sell people on the idea that it is. A lot of people were suckered in to buying houses when they weren't financially stable enough to, and in buying more house than they can afford.

And we're reaping the benefits of that now, with an estimated 2 million people facing foreclosures by the end of 2007. People that buy and sell real estate are going to make a killing, buying up foreclosures at 50 cents on the dollar at worst. Add to that all of the Baby Boomers who are going to start retiring and thinking their homes are worth a lot more than they are, trying to sell to move to Arizona or Florida.

In my opinion, you're going to see home prices drop like a rock and a lot of mortgage brokers go under. There's already a huge glut of homes that can't sell (6-8 month's backlog in some areas) and it's only going to get worse.

Answer 6

The reason way people goes into default varies. Sub-prime is and was a good program. Like other good thing if you misuse it, it may come back on you. The closing and/or moving of employment, car accident and many other things can set on behind on there payments. So just lost their mind and felt like they need a BMW or SUV with a $750 car note.
If one was to live which in mean, their credit would had been good enough to lower their payments. But, what do I know?

http://1stmdloans.com

Answer 7

Not destroing America.
But they are sure helping with the crash. The bubble was made by the Realtors them self that is what messsed up the market..
http://www.breakingbubble.com/

Answer 8

no just because they had a poor credit rating does not mean they were doomed never to own there own homes, its just harder for them than the rest of us