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.
