Subprime Mortgage Companies

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.

Subprime Mortgage Lenders

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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