The Subprime Bait and Switch

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• Reader Comments (6)

  Page 1 of 1 pages

  Let the buyer beware!

  There was a time when lenders were fewer and more cautious to whom they loaned. Their investors expected them to use disgression when loaning their money.

  When my wife and I bought our first home her income was not counted. Even though we were confident we could make the payments, my income was too low for us to qualify, so my Dad co-signed the mortgage.  We found a fifteen-year-old car with low miles and avoided buying other things until we had the cash. After six years we were able to sell and buy a larger, nicer one.
  Today not to count the wife’s income (due to the likelihood of pregnancy and income loss) would not be allowed.

  There are many other factors which contributed to this mess — some legitimate and ethical, some not —but the primary one is greed. Greed of the lending institutions, their agents, their investors, and also buyers who want things now whether they can afford them or not.
  —————————

  Think about these comments from the article:

  • “Congress however is unlikely to pass comprehensive legislation that deals with predatory lending, says Smith.”

  They will probaably make a show of some sort of legislative fix, but legislation is not the answer — self control and common sense are needed on the part of the buyers/borrowers.

  • “At closing, subprime borrowers are often presented with terms that do not match those previously offered, and then pressured into signing documents they have not had time to review.”

  They have not had the time to review?!?

  TAKE THE TIME to read the contract — if you don’t fully understand it — DON’T SIGN! (A good argument for learning English.) If there is pressure to sign — DON’T!

  • “These loans keep being made because investors make a profit,”

  That’s what lending is all about.  No profits — no loan company.
  • “...nearly 20 percent of subprime mortgage loans made since 2005 will end in foreclosure, at a loss to the consumer of around $164 billion.”  (A lot of investors are also getting burned by this — high returns are also high risk.)

  Have a lawyer, financial advisor, or savy friend look over the contract. Be honest and up front with him about your income and other expenses. Put off buying if the cost is more than sensible.

  • “Subprime lenders,” says Smith, “are taking advantage of the fact that they’re the only game in town.”
  This statement itself should be enough of a red flag to warn anyone.
  ———————————& ———————

  The following statement is a beaut!

  “The problems in the subprime mortgage industry should be framed as an affordable housing issue,” says Hofeld. “We often compartmentalize the way we think about issues, but I really think that predatory lending is something that is decreasing the supply of affordable housing. And the lack of access to mortgage credit on fair terms is something that prevents people from getting into homes.”

  Nonsense! (Hoefeld is also compartmentalising here.)

  Buying beyond your means is YOUR problem. If people won’t buy what’s available because it is too expensive, builders will be forced to build housing at a price which will sell. A house no different than any other product — food, a car, a sofa, or a pair of socks.

  Posted by whattheheck on Jul 16, 2007 at 3:28 PM

  Most “subprime” lendees i know AREN"T poor or minorities… they are mcmansioners.

  Posted by SekhmetSatRa on Jul 17, 2007 at 1:59 AM

  What responsibility do the homeowners have for signing for a loan they may not be able to pay for? 

  Perhaps it is the failure of the government-run publick edukashun system that many new homeowners do not understand how an amortized loan works and that an adjustable rate mortgage means the interest rate on the loan can adjust upward. 

    These ‘predatory lenders’ need customers who voluntarily sign on the dotted line.  Typically, those who need subprime loans are those who have existing credit risk due to their past circumstances, or because of their own poor decision making.  Thus, they do not qualify for a traditional loan.

  At some point, people have to take responsibility for their own actions.

  Posted by JT_Lancer on Jul 22, 2007 at 7:26 PM

  Here are the Top 10 Mistakes Mortgage Borrowers Make:

  1. Not knowing which mortgage fees the borrower can—and cannot—negotiate. Or how the lender actually makes money on you. Without this understanding, a smooth operator could bilk you out of thousands of extra dollars . . . in mere seconds, since you don’t actually write a check for these costs.  Remember, the loan officer is different from your friendly bank teller. The bank teller is probably paid a salary to be courteous and helpful. The loan officer’s job is to make money and is probably paid on commission.

  2. Choosing and trusting the first loan officer the borrower interviews. Just like you probably wouldn’t say yes if someone asked you to marry them on your first date. You are looking at a commitment here of the largest single investment you will ever make.  In fact, it will probably last longer than most marriages!

  3. Using an interest-only or “payment option” adjustable-rate loan primarily to qualify for a more expensive house than you could normally afford. In the current market of slowing appreciation and falling prices, such a loan could leave you with a mortgage balance that could be more than the value of your home. And if the payment adjusts from a below-market teaser rate, you may be paying hundreds or even thousands of dollars more per month or may even no longer be able to afford the mortgage. You may be looking at a foreclosure and the loss of your biggest investment.

  4. Thinking the interest rate is always the main thing. Most so-called astute mortgage shoppers think they should call around to shop rates. And rate envy is common, especially among male borrowers. But what closing costs will you need to pay to get that fabulous advertised rate? Do comparison shopping not just on the interest rate but on all of the loan costs.

  5. Not comparing the final fees listed on the closing documents to the up-front estimates to avoid the lender packing the loan with added-on fees without the borrower’s knowledge. It is relatively easy for the lender to do this because there will be a ream of forms that you will need to examine and sign at closing. A deceitful closing agent may also use various tactics to distract you from the inflated figures so you won’t even notice.  And never sign any forms with blank lines “to be filled in later.” 

  6. Not knowing if the mortgage has a pre-payment penalty - until it’s too late. Else you could find yourself in a Catch-22: You may need to refinance the mortgage so you can afford the monthly payment, but you may not be able to afford the prepayment penalty to allow you to refinance!

  7. Thinking that renting is always just throwing money away. At least in the short run, it can cost thousands less to rent. For instance, don’t buy a starter house. If you will be living in the area for less than five years or are unsure of how long you will be in your current job or marital status, you could potentially save thousands by staying in your apartment. Closing costs alone on a house (if you negotiate properly) may be $1,500 to $2,500. You may also be looking at a Realtor fee to sell your house of 6%. On a $200,000 house that’s an additional $12,000. And the moving van hasn’t even pulled up to your door yet!

  8. The borrower does not know if he or she is paying a back-end yield spread or Service Release Premium. These are fees paid to brokers and loan officers (the “kickback”) for upselling the interest rate to borrowers.

  9. Paying for mortgage life insurance, credit insurance or other expensive lender add-ons to increase the amount of kickbacks the lender can receive from various vendors.

  10. Paying hundreds of dollars to have a company set up a biweekly mortgage payment plan, something the borrower can generally do for herself or himself—for free.

  From “Kickback: Confessions of a Mortgage Salesman,” one of the best-selling books on mortgages on Amazon.com.

  Posted by tjanusz on Jul 23, 2007 at 8:13 PM

  I used to think that banks kept (were stuck with) the loans they made, but many loans are sold to pension funds etc. that are trying to chase higher returns to meet obligations to retirees.  The originators don’t need to care about the soundness of the loan.  They just want their commission.  The problem is that if (when) home prices fall, the value of the investment (collateral) disappears.  Its a catch-22.  If they don’t renegotiate the interest rate, more people will walk away from a home that is worth less than the amount they owe.  If they do renegotiate the loan, the return on the investment drops.
  Another problem is that if an institution that holds these loans sells them at a discount, it causes all other institutions that hold them to lose the value of their collateral (real free market value!).  If they are leveraged (using that collateral for debt), they must cough up cash to cover that lost value.

  Posted by cougars on Jul 25, 2007 at 4:12 PM

  It’s disappointing to see that most of the comments have been quite patronizing toward people who have signed exploitative loan contracts.  The responsibility is ultimately on the borrower, of course.  Nevertheless, any advice I would offer consumers would be less along the lines of “don’t overspend” and more about “understand the adversarial nature of consumer finance.”

  Personal choice is definitely constrained by market conditions, and relative poverty means not only constraints on what can be bought, but where.  Interest rates, like insurance rates, are literally inversely proportional to ability to pay, a situation which results in “positive feedback,” which is to say a “spiraling” gap between differing levels of affluence.

  Apologists for the market system need to come to terms with the fact that a competitive market must be a transparent market.  Market transparency as I understand it means that finding out the “going rate” of interest given one’s income, net worth, credit score and other relevant variables, is a calculation based on public information, not an individualized rate quote for which one must jump through hoops, endure high-pressure sales pitches, or face other organized resistance to information disclosure.  This situation is further removed from transparency/competitiveness by the fact that means by which the so-called “F"ICO score is calculated is basically secret.  Even the statutory provision for “free” access to one’s “F"ICO score comes with plenty of strings attached; an illustration of the general futility of expecting legislation in the public interest in these times of right-to-center political spectrum.

  The prevalence during the pseudo-boom of the so-called “interest-only loan” (perpetuity?) and the “pre-payment penalty” are indications that the moneylenders are more interested in keeping people indebted in the long run than they are in getting their money back.  Combine this with the fact that business is allowed to use “F"ICO scores in hiring decisions and it begs the question of whether employment has “evolved” into indentured servitude.  If you’ve seen the movie On the Waterfront you may recall the “no loan no job” racket in the hiring line.  Surely we’ve all hear the rumor(?) “bad credit is better than no credit,” as well as the “yuppie Nuerenberg defense:”  “I’ve got a mortgage.”

  I’m not above calling the financial sector an underregulated industry.  If that makes me a commie, so be it.

  Now the flavor of the month seems to the “reverse mortgage,” which if I understand it right should be the final nail in the coffin of the middle class.  Buyer beware!

  Good luck out there.

  Posted by n8chz on Oct 16, 2007 at 6:12 PM

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