All too often when reading a news article about subprime lending, the author defines “subprime” as loans given to those with less than perfect credit.  While this may be true in some cases, it by no means covers everyone that is in a subprime loan – such as the popular 2/28 ARM. 

There are many reasons why someone with good credit may be put into a subprime loan, some of them include:

1) The borrower chose the product.  Many of the 2/28 offered attractive terms and good rates.  The teaser rate could help get a borrower qualified for a higher loan amount.  Combine a good starter rate with an interest only period or option payment loan and it could mean some real savings over the first two years of your loan.  But now that rates are resetting, interest only and option payment periods are expiring, many are finding payments on their loan higher than what they can now pay.

2) Self-employed borrowers were commonly placed in subprime loans.  Documenting income for a self-employed person can be difficult and time consuming.  Depending on how much income is actually shown on the tax return, it could limit loan amounts or turn an approved loan into a denied one.  The solution?  No income verification loans and stated income loans. 

3) Inexperienced or lazy loan originators.  There were plenty of originators that never had done mortgages before the housing boom.  They may not have grasped all the conforming loan guidelines. Subprime loans had few rules or qualifications.  The ease of approval and quick processing times made the subprime loan a go to product.

4) Greedy loan originators.  Many of the subprime products paid the loan originator very well for each loan.  Not only did they pay well, they were easy to do and quickly completed.  That left more time to do more loans and make more money.

Many of the borrowers put into subprime loans had no reason to be in the loan they were placed — and now many of those same homeowners are finding it hard to make their mortgage payments. 

These people are losing their good credit that they had worked so hard to establish and face losing the home that put them into this position. 

This is only one of the reasons why The Bush Administration and the Federal Housing Administration (FHA) created the FHASecure product; to help struggling homeowners.  If you have had a rate reset and have fallen behind on your mortgage payment because of it, make sure you check to see if the FHASecure program can help you.

The Bush Administration today announced a new initiative called “Hope Now” that brings together mortgage lenders, service companies, counseling agencies, investors and large trade organizations.

Starting in November, the program will launch a direct mail campaign and develop a best practice methodology for counseling groups across the nation to ensure speedy loan modifications wherever possible.

According to Treasury Secretary Henry Paulson, 11 of the largest mortgage service companies (representing 60% of all mortgages in the country) have already agreed to join the new coalition. 

“These leaders recognize that by working together, coordinating and scaling up their activities, they will be able to work toward the goal to help more homeowners.”

The HOPE NOW website is up and the initiave is coming on the heels of the FHASecure initiave announced by the Bush Administration in August. 

From our friends at Agora Financial — the most-up-to-date-information on how many Adjustable Rate Mortgages are resetting in the upcoming months. 

As more people are running into trouble with their “exploding ARMs” and are faced with only 2 options — selling their house or going through foreclosure, they are running into another problem — the buyers are few and far between.

More homes on the market + fewer buyers = record low pending home sales in August.

According to the National Association of Realtors, the Pending Home Sales Index fell 6.5 percent to a reading of 85.5 from an upwardly revised 91.4 in July, based on contracts signed in August — 21.5 percent below the August 2006 index of 108.9. 

This August reading is the worst since January 2001, when the index was first started.

How long before these numbers turn around?  I don’t know.  But if you find yourself in the situation where your Adjustable Rate Mortgage has adjusted to the point that you can’t afford it — and before you give up and become another statistic (either joining the record low number of pending home sales or the record high number of foreclosures) — make sure you talk to someone about whether or not the FHASecure program could help you in your situation.

On Tuesday, the House passed a bill designed to help borrowers who have been hit by the subprime mortgage crisis by a vote of 348-72.

Some of the highlights of the bill include:

1. $300 Million per year to be put into an affordable housing fund.
2. Agency loan limits raised to as high as $729,750
3. Elimination of down payments on FHA loans (currently a 3% down payment is required)

The House vote came on the same day that the Fed vcut its overnight interest rate target by 50 basis points to 4.75%  and according to Moody’s Economy.com analyst Ryan Sweet, this rate cut will not “Save the day for the consumer” and  ”Further action is going to be needed.”  He points consumers to watch for further Fed action in October and December.

According to the Associated Press, foreclosures more than doubled versus August 2006 and were up 36% from July 2007.   RealtyTrac counts a total of 243,947 foreclosures for August, 2007 — the highest month on record since they began keeping track 2 years ago. 

There is currently an FHA reform bill circulating through the legislative process in Washington.  Should some version of this bill pass, it is estimated that 200,000 borrowers may be able to qualify for an FHA loan who previously couldn’t qualify for a loan due to recent changes in the mortgage marketplace.

Of note — it is estimated that even if some form of the FHA reform bill does not pass, approximately 80,000 people can avoid foreclosure due to the FHASecure announcement from President George Bush last month.

Congress, banking regulators and President Bush all are promoting a potential way for subprime borrowers to avert foreclosure. Called loan modification or loan workout, it means changing a mortgage’s terms to make the payments more affordable. 

According to The San Fransisco Chronicle, this isn’t exactly happening. 

“There definitely is a disconnect between what the lenders are saying and what borrowers and counseling agencies are experiencing,” said Kevin Stein, associate director of the California Reinvestment Coalition, a statewide advocacy alliance that promotes access to credit. “It is disheartening to hear from counseling agencies that things are not working out the way they should. There is no accountability. There is no way for anyone to know if what the banks say is coming to pass.”

“Lenders are not modifying these (adjustable-rate) loans,” said Martin Eichner, director of dispute resolution at Sunnyvale’s Project Sentinel, a nonprofit agency that helps consumers with housing problems. “A lot of these loans are so hopeless and irrational that lenders won’t even talk to us.”

If you find yourself in a situation where you can’t make any progress with your lender on a “loan mod”, make sure you speak to an expert about whether or not the FHASecure program will work for you before it is too late.

According to this study produced prior to the FHASecure Initiave by the Center for Responsible Lending, a person who took out a subprime loan on a home in the Phoenix MSA in 2006 has a 21.1% chance of foreclosure within the lifetime of that loan.

That means one in five people who took out a subprime loan in Phoenix in 2006 are going to be facing foreclosure in the future.  It is less than half of that if someone took out a subprime loan between 1998 and 2001.

Does this sound shockingly terrible?

It is.

But it gets worse.

If you live in Bakersfield, California and took out a subprime loan on your home in 2006, you have a 24.2% chance of facing foreclosure in your future. 

It looks to me like these statistics point to one of the main reason we we have blogs like this in Bakersfield and like this in Phoenix.

Glancing at the report, it looks like the average % chance that someone who took out a subprime loan in 2006 will see foreclosure is about 19%.  One in five. 

Can the newly-announced FHASecure program  fix this problem?  Not entirely.  But it certainly can’t hurt.

Whenever a new program such as FHASecure is launched, HUD issues something a “mortgagee letter” to all FHA Approved Lenders.  The official HUD Mortgagee Letter with the subject titled: The FHASecure Initiative and Guidance on Appraisal Practices in Declining Markets can be found here.