Subprime and Bad Credit Mortgage Lenders: Are They Responsible for the Subprime Meltdown?
Many folks have tried to lay the blame for the subprime mortgage meltdown which could plunge the nations real estate market into a decade long decline on unrestrained or crooked mortgage brokers. However, the mortgage brokers could only sell what the subprime lenders created. So do you blame the monster or Dr. Frankenstein himself?
In this analogy, the subprime or bad credit mortgage lender is Dr. Frankenstein. They created the risky programs, approved the loans, and provided the money at closing, and sold them to the secondary market investors. The monster is born and set loose.
But there’s more to the story…
A bad credit lender lends their money to you. After that, your loan along with others like it are bundled up and sold to an investor. The lender doesn’t have endless supplies of cash so they need the investors to buy the loans they close. This way their money is replenished to lend out again and they make a profit from selling the loans to the investor. It’s the same thing that happens in the traditional or “A paper” mortgage world.
The only difference is you have a couple of organizations called Fannie Mae and Freddie Mac governing the A paper world. They make the rules on how loans get approved and priced. If the “A” lender follows the rules, the loan gets an insurance certificate. The investor buys the insured loan. If the loan goes into default, the investor is not out their money. Since the loan is insured, Fannie or Freddie pays the final investor for the defaulted loan. A bad credit mortgage lender does not have any insurance for the final investor. If the loan goes into default, the final investor has no recourse. They just lose money. So with this added risk, the bad credit investor wants higher rates to justify the investment. The lust for higher and higher rates of return is real driving force for the subprime market.
So who really makes the rules for bad credit mortgages? The investors themselves do. The investor decides how much risk they will take, what rate is acceptable, and what kinds of loans they will buy. If the lender doesn’t underwrite and approve the loans using the final investor’s rules, the investor won’t buy the loans. Then, the lender is stuck with the loans and won’t have as much money to lend out.
The investor is always changing the rules depending on what’s happening in the market. Currently, foreclosures are going crazy. You would have to be living under a rock not to know. Because so many of the mortgages in foreclosure are bad credit mortgages, the investors are changing their underwriting rules. Remember, the investors don’t have an insurance policy to fall back on. They are stuck with the loss themselves. In order to cover some of their losses, they are changing the rules. The investors want some extra equity if the loan goes into default. Right now they require the lender to get a review appraisal or a BPO (broker price opinion) letter. A BPO is simply an agent giving his or her opinion of what your house is worth. And guess what…the review and the BPO almost always come in lower than your appraisal. When this happens, you need to bring more money to closing, get less cash out, or get denied all together.
The bad credit mortgage lender lends money to folks with credit issues but that’s all they do. As soon as they close your loan, it gets sold to the investor. They have to follow the final investor’s rules.
So, hold the phone…does that mean Dr. Frankenstein build the monster at the behest of others? Sure it does…so the greedy final investors must also share the blame with the subprime lenders.
As in all things in this industry, most of the story is hidden from view.
But not for you… now that you know the “inside” story about the subprime lenders, final subprime investors, and how they let a monster loose to destroy our village.
Previous Post:« Most Advice On Picking An Agent Misses the Mark
Next Post:» Subprime Mortgage Losses Hammer The Stock Market
Tags: Bad Credit Mortgage • Credit Issues • Mortgage Lenders • Mortgage Meltdown • News • Subprime Lenders • Subprime Mortgages
Smell some more of that coffee folks and ask yourself. Wwhat started this whole mess in the first place. It was the government regulators who steped in and imposed regulation which shut off the flow of dollars to the subprime market. They went in with their oh so common finger pointing and blame techniques. They did this to us and convinced us all under the guise of “predatory lending, Fraud” and ohhhhhh, dont forget “High Foreclosure Rates” When in fact the exact opposite was true, mortgage backed bonds , the industry and the housing market as a whole was making plenty of money. Tell me, do you see a problem with a very low 1-3% foreclosure rate in an up trending real estate market, a market in which the value is more than the foreclosed loan amount? Or in comparison to a trillion dollar mortgage market where huge amount’s of profits are being made by everyone? We now have, so like the like the democrats, the government throwing billions dollars away thinking that they can fix the problem they caused, I think NOT! The government regulators only goal was to pop the housing bubble and to take control over the entire trillion dollar mortgage market through FANNIE AND FREDDIE MAE and FHA. I ask, doesn’t that sound like fun to have these same people in control of the market? It is the government regulators who are not only Predatory but Fraudulent and Reckless in there control over the mortgage lending market. Their interventions and action’s have cause this self fulfilling prophecy, they will only burn the place to the ground if people don’t wake up and put a stop to it. It is because of their reckless and fraudulent actions that a lot of good educated people will wind up paying the price. Learn to read between the lines people and stop allowing the Government to protect you from yourselfs.