Mortgage Lending Courses
Subprime Mortgages – a brief history
Subprime lending is not really a new phenomenon. The types of non-traditional loans that many subprime borrowers taking out today have grown from something we used to call a "bridge loan". It was typically very short-term loans with high interest rates, which were intended to help a person to buy a new home while the old home was still on the market. As soon as the old residence was sold, the owner would repay the bridge loan. Some of these non-traditional loan contained a "balloon payment" a large amount due at maturity because they do not depreciate fully contract. Monthly payments were relatively low, and the balloon came at the end. The idea was that the person was expected to have sold the first home at the end of the loan, and the large balloon amount would come out of the proceeds.
Another factor in the development of subprime lending, as it is today was the gradual liberalization of banks from the mid-1970s to mid 1980s. Deregulation meant that banks could open branches much more freely, but it also meant that interest rates went sky high. At one point, the average rate over 10%. The housing market began to slow as the interest rate meant that many potential home buyers were no longer within reach of owning their own home. It was around this time that the subprime adjustable rate mortgage (ARM) entered the American scene.
A borrower who chose an ARM would probably have sufficient skills to the lower rate. And, (PMI) private mortgage insurance was offered to buyers, as lenders would be protected if the buyer defaulted. PMI offset potential losses to lenders if the borrower fails to repay a loan and lender can not recover his expenses after foreclosure on the house and the sale of the property. If you really wanted to buy a house, they were available, but at a price. Some bankers were told that they could raise interest rates even higher, increase closing costs and fees and make an excellent outcome from people who were unlikely to be able to repay their loans – if they just assumed a greater risk.
Banking Deregulation meant that new branch banks on every corner. Money for loans was available. And real estate looked like a good way to get rich quickly. Any good size sociability were likely to have one or two new real estate agents in it. There was an astonishing array of seminars and courses to make money by selling real estate.
And of course as always happens, it is changed. Investments that had seemed safe was not that people were losing money. There were new rules to help us through the property crash. So the wave crested again: house prices were rising, the market was stabilizing, and here we were in a real estate boom! This time, however, potential homeowners who previously would have been eligible for loans were able to borrow large sums. Underwriting requirements of lenders, slipped, you could borrow money to non-banks as easily as in a bank. Verification of income of a borrower became less of a problem as lenders rushed to make as many deals as possible with borrowers.
It is a brief description of subprime loans. Face has worn for the last decade and is still wearing today is very different from the way it looked back in the 1980s deregulation days. Perhaps we should consider the idea of returning to the way we used to handle loans. What we are doing now does not seem to help someone very much – except perhaps for subprime lenders.
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