Why did people take out subprime loans? Don't they know rates will increase some day? Save for down payment?

Question

If they would have just saved up down payment money, they could buy a house cheaper now. Why are people so irresponsible?

When the market so high that most people cannot purchase a home without something like a subprime loan, they should know prices are ready to decline.

Answer 1

Being a lender and the financial adviser of schedule one bank I have declined many of these loans. In the same token if you consider the rent they pay, sometime that coincides with the mortgage payment and thus their thought process is why pay someone else's mortgage when I can be increasing my equity. Unfortunately when the affordability is not there it creates huge cash crunch and eventually to make their mortgage payments they wind up extending other credit facilities which wind up creating a huge downward spiral. with cooling down of the market the sale of their home in order to get out of the debt crunch becomes no longer an option. True they could save more for down payment but when the market was hot there was nothing that was affordable.

Answer 2

As I sit back and read comments that people leave about subprime lenders. I am amazed at all the name calling.. Yes we do need subprime loans. NOT ALL subprime lenders are irresponsible. Maybe it was the economy for this .. I am in Ohio and we lost steel mills, potterys.. not everyone has a 250.000 a year job. What is wrong with someone owning their own home? We deserve the american dream too.. Im not saying go buy a 100.000 home when you living on a small budget.. NO WAY th at is stupid. BUT here in my town you can find good homes at a good price.. Heck, rent here is very high .. why not buy a home and it is yours? Im tired of hearing people put subprime lending down, yes it is in trouble.. but what about everything else? I blame the economy.

Answer 3

Why are people who don't have their backs against the wall, so judgemental about those who do?
Did you ever consider that these people saw home prices accelerating faster than they could ever save an adequate down payment? Many of them felt that they had to act fast, or lose the chance to ever own a home. A sub-prime loan was the only way they could do this. Had they waited longer, and had home prices continued to escalate at such a fast pace, they would never have been able to get into the home market.

Answer 4

In most typical subprime transactions, it has very little to do with the irresponsibility of the borrower. I'm not letting them off the hook, but the lender or mortgage broker is obliged to offer sound advice as to how the financial instrument actually behaves and that, unfortunately, was not the case in many, many cases.

The thing that has always plagued my conscience is the lack of licensing and certifications for loan officers. These "professionals" are advising folks with the single largest financial transaction of many average Americans' lives and most loan officers are what I like to call "Hamburger U. graduates". Many of these loan officers are mortage broker employees trying to grab quick money through commissions based on volume and loan product.

Answer 5

Many couldn't afford a house any other way and the loans were very easy to get.

Also, many people didn't stop to think that the housing market could cool down or crash. They thought they would be able to refinance before that happened. Now that their houses are worth less than what they paid for them, they can't refinance and their mortgage payments have skyrocketed.

Answer 6

Why are banks so irresponsible as to offer people they know can not afford the loans based on their incomes?

Does the lender hold no responsibility for approving the loan to benefit the bank? Why did the bank approve people with no down payment and low credit scores with average to low incomes?

Answer 7

I believe that folk get excited about purchasing a property. Thus, they may foolishly believe that the lower rate will stay constant, but that is not the case. It is a dirty trick by business people to "fool the public" and just make a sale. Both sides of the coin are irresponsible.

Answer 8

Such people don't think like you when it comes to money. They live paycheck to paycheck. They'd rather have whatever it is they want more than having money in the bank. They don't desire to live within their means. They tend to live for the moment.

To these people, being in debt up to their eyelids is a natural state of being. I like to jog. Jogging 4-5 miles 5 days a week is no big deal to me. It's my natural state of being. But, others think this is strange. They can hardly imagine walking 1 mile let alone jogging 4-5 miles.

I jog that much because I like to be in shape, it gives me energy, it clears my head and I enjoy. They think I'm crazy because it sounds like a lot of work, I could get injured and they simly have other priorities. We just have different mental models. Who's right? I tend to side with the joggers and people with good credit scores.

More stupid...the companies lending out the money to such poor risks. It's amazing what "smart" people can delude themselves into believing.

Answer 9

Even the poor want their little taste of the American Dream.