Subprime Mortgage Lenders
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Originally, the role of subprime mortgage lenders was a responsible one; however, the term 'responsible' has been stricken as a result of their predatory behavior. Among other things, their reckless practices affect the economy on a worldwide scale. By definition, they extend money to borrowers who are unable to get conventional loans. Indeed, they are also called "bad credit lenders". As a rule, the characteristic distinguishing these lenders is charging higher interest rates than the ones offered by conventional lenders. Incidentally, this type of lending is also called B-paper financing. They charge more because of the greater risk associated with the loans. In actual fact, both the lenders and borrowers run higher risks.
The education of both reliable and predatory mortgage lenders can start out the same. First of all, becoming a mortgage loan officer on a lower level is relatively easy. In this case, a high school diploma is sufficient. Nevertheless, a college education provides a higher starting salary, and careers advance much more quickly with a college degree. Naturally, there are schools offering loan officer training, and studying this subject on the Internet is also a possibility. In addition, there are continuing education courses for those keeping up with current trends. The loan officer acquires a certificate upon completion of the program. Loan officer compensation varies depending on the state and expertise. Being self-employed or working for a company also makes a difference, and for some a seven-digit income is possible. A reliable mortgage lender discloses loan details such as: third party fees; ARM loan rates, margin, caps, minimum and maximum rates; mortgage insurance; points and rates combinations, and credit score requirements. In direct contrast, subprime mortgage lenders avoid open and benign methods for helping consumers attain their goal of owning a home.
The subprime mortgage lenders advertise through online sources, signs, commercials, and referrals. While the majority work independently, some affiliate themselves with the mainstream operating under different names. Some in this profession offer both prime and subprime loans. If unable to underwrite a consumer for a prime loan, then they turn to B-paper financing. Simply put, the term subprime defines a borrower who is not 'prime'. Therefore, borrowers include those with maxed out credit cards, also people with bad or no credit, as well as those with low incomes. Potential clients also include people unable to meet Fannie Mae and Freddie Mac criteria. In general, the reason their financing costs more is the combination of poor credit history, lower income and high interest rates; however, an extremely low credit score will disqualify. As a matter of fact, scores falling somewhere in the middle may disqualify a consumer. In this case, the lender takes the down payment, ratio of total expense (including debt payments) to income, and ability to document income and assets into consideration. Moreover, subprime mortgage lenders also consider the purpose of the loan and type of property. For example, approval of a prime home loan does not guarantee the same borrower approval of an investment property under prime terms.
Generally, subprime mortgage lenders are labeled predators. This is mostly because a much higher rate of subprime loans go into default. And even if they don't go into default, the majority prepay early. Also, there is a predatory mortgage commonly used that is unique to this market: the 2/28 ARM. These mortgages have a fixed rate for 2 years, but are reset after reaching the 2-year point. In other words, the rates end up equaling the current index - plus a high margin. As a result of this, whether or not the market rate is different there is a sharp increase.
Lenders victimize people in many different ways. For example, they target borrowers actually eligible for mainstream loans. In other words, using deception lenders charge prime borrowers subprime prices. Sometimes borrowers are vulnerable simply because these people don't know how to find out if they are prime or not. However, deliberate deception is the most common reason. When predators seize the opportunity and charge prime borrowers B-paper rates the practice is called "steering". Furthermore, these aggressors prey on people who already have mortgages. For example, the lender entices borrowers with the amount of cash possible to take out of their property which is called a cash-out refinance. Also, subprime mortgage lenders hunt victims in lower-income neighborhoods. Minorities and/or people with lower-incomes often have relatively less education. Therefore, predators very easily deceive these borrowers during their presentations. Accordingly, borrowers default due to features such as high prepayment penalties, not to mention other hidden features. And as a result, these homeowners experience foreclosure. "The rich ruleth over the poor, and the borrower is servant to the lender."(Proverbs 22:7).
Some consolation can be gleaned from the fact that subprime mortgage lenders also experience failure during an economic crisis. Even large-scale institutions pay dearly for their recklessness. Yet and still, the negative consequences of an economic crisis paint a frightening financial picture for society as a whole. In fact, its negative effects unsettle billions around the globe. As an illustration: a credit crunch, or credit squeeze, makes loans much harder to obtain for everyone. So to put it mildly, this profession is regarded as disreputable. In summary, subprime mortgage lenders' original reputation for responsibly benefiting people otherwise shut out of the housing market is tarnished.
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