Subprime Mortgage Lending – 2007 Statement
by TheTruthAbout
The United States Treasury Department, along with several other federal financial regulatory agencies, released a Statement on Subprime Mortgage Lending in June 2007. This sizeable document (it is 31 pages long) is aimed at people involved in borrowing and lending for mortgages at subprime rates. Of particular concern to the authors are adjustable rate mortgages (ARMs). The Statement provides guidelines that will ensure more appropriate practices regarding ARMs. The agencies are concerned that lenders persuade borrowers to take out ARM loans by giving them an extremely low rate of interest (called a “teaser rate”) for the first few months. Unfortunately, this rate adjusts upward very soon to a formula based on and exceeding the prime rate. Now the loan is no longer within the means of the person who is classified as a subprime borrower, and it will cause extreme financial hardship. Other issues covered by the Statement are below.
Adequate documentation of income for subprime borrowers is not always required by lenders. This practice is of concern to the agencies because it leads to so-called “liar loans.” A borrower can put whatever inflated number he chooses on the application form, knowing there will be no effort to verify that this is truly the amount of his income. These loans greatly increase the chance that the borrower will default, which is a problem for the lender as well.
The agencies also address the problem of the introductory rate period. Most ARM loans include significant penalties for early prepayment, and the penalties extend well past the initial period. In addition, borrowers are not always given full information about additional monthly payments that will be required, such as taxes and homeowners insurance. This failure to disclose such information leaves the borrower at an enormous disadvantage, and will no longer be permitted.
It is interesting and unusual that, three months before releasing the Statement on Subprime Mortgage Lending, the agencies involved in creating it requested comment from the public, from members of Congress, and from financial institutions that engaged in mortgage lending. From the industry came the comment, over and over, that they are opposed to disclosing to borrowers all the details of ARM fees and rates. They think that would result in “overloading the consumer with information”! This is of great concern to the agencies, and to the author of this article as well. We don’t think the average consumer requires the protection of subprime lending agencies from information overload. Consumers can handle information just fine! Failure to disclose costs and fees for which the borrower will be responsible is nothing short of deception.
Virtually all comments reflected uneasiness that there was no adequate definition of the term “subprime” within the Statement. When the final revision appeared in June, readers were requested to refer back to the definition of a subprime borrower contained in the earlier guidelines document Expanded Guidance for Subprime Lending (2001). All the pertinent characteristic are listed there, and can be used in determining whether a particular borrower should be classified as subprime.
The Statement also requires that every borrower be given a full repayment schedule, including information on amortization, and an estimate of the amount of insurance and taxes that will be applicable. This must be done whether or not the extra costs are escrowed and are included in the loan. The extra charges must be part of a mandatory and accurate calculation of the borrower’s debt ratio.
The Statement on Subprime Mortgage Lending is a valuable effort to remedy some of the ailments of the current housing market, and insure that subprime borrowers as well as subprime lenders are not left with a financial disaster on their hands because of imperfect communication between them.
In 2007 the Real Estate Bubble began to deflate with Subprime mortgages busting the loudest. The stock market collapse in half in 2008. This 60-Minutes special features experts that say 2010 is going to be worse. Millions more Americans are going to face foreclosure with their homes underwater, even prime mortgages. Home values are going to decrease another 30-50% in the most inflated markets. Get out now and go into safer assets. Be ready investors and 401k holders, your stocks are about get cut in half AGAIN when this new panic across the entire platform of the housing market in 2010/2011. Deflation, then more bailouts/stimulus, then serious inflation.
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here in NH major banks are not providing mortgage loans even to those who can afford it. real estate broker i know stopped taking homes for sale because no person can get a mortgage. 3 houses on my street were up for sale but could not sell, not because there were no buyers but those potential buyers coundn’t get mortgages. now taken off the market and owners are renting them, it’s going to get worse!
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McMansions will continue to depreciate, baby-boomers must sell to retire! Who will afford the energy costs in 5 years, let alone 15 if Global warming is the calamity that some claim?
These fucking houses were way too high to begin with. And when this is all over…they will STILL be too high! The average asshole simply CANNOT afford a fucking house in todays job market!!! Go alt-a, give REAL people a break.
same situation….get an attorney..to much corruption in the paper system and mers…fight these jags. F@#k Chase and all the other banks.. They make way more on foreclosing then modification. thanks to? the bailout to AIG and big banks.The Gov allowed this because all there buds (big banks ) were making huge money…and now with the biggest financial heist in American history they have hedged there bets and made money on the bailouts. For the people by the people.nope. For the Gov. by big bus.
We cannot get this economy going until the banksters allow real estate to deflate at least 60% down to real value so that people can afford homes. Lowering interest rates does nothing if homes are overpriced. Homes must drop another 60% and this will ignite buying and stimulate industries tied to the real estate market. If we don’t allow Deflation, nobody will spend. Everyone will wait for prices to drop. We need to let prices fall now!
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Boy i’ll tell ya, that Ashkenazi has every angle covered…haha dude gonna get his money!
Its called The New world Order you flouride drinking potatoes. What, you think WAR is only on a battlefield?
@monkeyman1140
You are very optimistic about the education level of mortgage loan officers. And yes, if you create a child part of your financial planning BETTER include how you intend to feed, clothe and house that child. If you are not educated enough to understand what the Note says, what the payment will do and how MUCH you can afford, you had better not be signing any papers. That single mother is equally responsible. If she doesn’t have the education GET ONE BEFORE having kids.
@gregg28801
No, Wall Street is 100% responsible. don’t lie to me and claim that somehow a single mom with limited english managed to fool a loan officer that has an Masters in Business Administration into getting her a loan.
Will work for food? WTF: Don’t get pissed, get even.
Public, non-cooporation is making the idocrat elite sweat, they are running scared, their Bilderberg plan is not working (out), fuck them, quit paying one red cent to bank credit cards, quit paying for inflated mortgages, quit buying crap, fire your bankster, quit working your ass off for shit wages in a shit job, non-cooporation is effective peacefull dissent, now lets see who’s got who really by the fucking balls.
Wall Street is only 50% responsible. What about the lying public, or uneducated public that didn’t understand the product, or even the public that refused to think ahead when it came to their finances? THEY are JUST AS RESPONSIBLE! Just because it’s offered doesn’t mean you should TAKE it. Would you jump off a bridge just because someone made the bridge accessible? The general, borrowering public MUST take responsibility and now they are having to pay for it as well.
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@Donuvan Brace yourself. The second ripple is coming, this should be headline news… retirements, 401k’s and mutual funds are going to get crushed.
Pretty scary stuff!
And yet Wall Street is resisting Glass-Steagall