Subprime Mortgage Companies
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Lately, subprime mortgage lenders have become the focus of attention as the economy experiences a general downhill slide. Some believe that the housing sector is the main reason why an economic downturn or even collapse seems imminent. Others dismiss such fears as being overly pessimistic. The question remains -- Are subprime mortgage companies performing a service to the community by allowing those who normally would not qualify for regular home loans a chance to own their own homes? Or are the subprime mortgage lenders predatory lenders who knowingly offer services to those who can not afford them, hoping to profit from the mortgage agreement without getting caught in the personal or financial repercussions?
A subprime lender is one who makes loans to those who can not qualify for regular loans from mainstream lenders. This is mainly due to a low credit score, but can also be affected by the ratio of income to expenses or an inability to document income. At times even the purpose of the loan can be a factor. A loan for a primary residence may be approved more readily than one for an investment property. Some unscrupulous lenders take advantage of an inexperienced or careless client by steering him or her toward a subprime loan, even if the person is eligible for prime financing. Some may actually pursue those who qualify for fixed loan rates, trying to lure these borrowers with promises of lower or interest-only payments. Such tactics are deceptive. While monthly payments may indeed be less, interest-only and adjustable rate loans will always cost more than a fixed rate mortgage.
Take the time to check with several lending institutions as one attempts to qualify for a loan from mainstream lenders, since requirements may differ. Although subprime mortgage companies will not stress that they are offering a subprime loan, this is generally apparent by the fact that the rates are higher than those of a mainstream lender. This is understandable in that the subprime mortgage companies take on a higher risk with clients who have a lower credit score. Also, people with such loans have a higher percentage of defaulting, so costs of borrowing for these loans are higher. However, if a borrower does not need to utilize subprime mortgage lenders, one should avoid the whole process.
If a person has few choices because he or she is only qualified for a subprime loan, there are still things to take into consideration. One common type of loan offered by the subprime mortgage companies is the 2/28 adjustable rate mortgage (ARM). In this mortgage, the rate is set for two years, and then this resets to equal some specified index plus a margin. The interest rate will rise significantly after the two year introductory period. Some buyers plan to fix their poor credit rating during that time and then refinance to a better interest rate before they get hit with the larger payment. Be careful that the account does not have a prepayment penalty which lasts longer than two years! Also, check on the state of the credit rating periodically to make sure that progress is reflected. Not to be too cynical, but 'forgetting' to report faithful payments can work to the financial interest of the subprime mortgage lenders.
It is sometimes difficult to separate a healthy self-interest from selfishness. Although some bristle at bringing morality into a conversation about financial matters, it remains true that actions are performed by people who -- for better or worse -- make moral decisions and then act on them. Mortgage lenders understandably want to make a profit, yet it appears that too many of them, when faced with borderline cases, are willing to look the other way in order to close on a loan. Borrowers are not exempt, either, as some make false statements on loan applications in order to qualify for loans which they can not afford. Further up the line deceptions are likely to continue, as bundled investments containing subprime mortgages are sold as securities. Larger mainstream lenders are drawn into the fray as they lend funds to those holding the loans, or hold portfolios composed at least in part by such mortgages. The stock market and world financial markets can likewise be affected.
In conclusion,there are many factors involved in the current economic situation. The housing sector is not at fault. Selfishness is certainly not the exclusive domain of either the borrower or the lender. Rather, the collective decisions of many people at various levels have contributed to the precarious situation. It is probably not that any particular person at any level deliberately sets out to cause financial ruin to others. Instead, it is possible that people are so focused on their own interests that others' welfare is never even considered.
However, selfishly seeking only one's own profit can cause harm to oneself as well. As Proverbs 26:27 states: "Whoso diggeth a pit, shall fall therein: and he that rolleth a stone, it will return upon him." As the costs of borrowing increase, and housing values decrease, people are unable to continue payments and then default on their loans. This not only causes losses to themselves, but also to the subprime mortgage companies, who have to account for loan failures. Increased defaults lead to an understandable reluctance on the part of investors and financial institutions to guarantee or fund future loans, which increases the subprime mortgage lenders costs of borrowing. This is passed back to the consumer in a vicious cycle. There has to be a better way, and it begins with individuals making decisions to act with integrity.
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