Subprime lending

I was asked to put together some stuff for a meeting, but I figured some folks here might like to check it out too. So, here is some stuf on subprime, it's benefits, and drawbacks.

A quick overview from Freddie Mac on the definition of sub prime and their benefits:
http://www.freddiemac.com/corporate/about/how_we_help/subprime.html

Here is an overview on how sub prime can be abused and what Freddie does to prevent it:
http://www.freddiemac.com/corporate/about/how_we_help/predlend.html

Here is a speech given by Federal Reserve Governor Edward Gramlich with an overview, benefits, and downsides
http://www.federalreserve.gov/boarddocs/Speeches/2004/20040521/default.htm

Finally, a much more in depth research paper done by the St. Louis Fed:
http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf

 

Hell, I've done tons of subprime loans. Don't like doing them, but sometimes it can be a good thing.

I've helped people with SHIT credit refinance their homes and pay off all their debts...sometimes saving $700+ per month. Within 12-18 months, they should be able to refi into a conforming loan.

Also helped people buy homes with bad credit. Same thing. The new mortgage helps their credit.

The NASTY part of the business? MOST brokers that put people in subprime loans charge 2% origination and make 2% from the lender. Their rationale is that the loan is harder to do....this more or less fucks the customer. You've probably heard the ads on the radio and seen the infomercials on TV. Also a big sponsor of the Bobcats. You know....the Charlotte company that's named after a man?

Also...MOST (not all) people that get/need subprime loans are too fucking stupid and irresponsible to even be a homeowner. They don't pay bills. Drive expensive as hell cars...they cause the mess. They do a subprime loan...pay off the debt...then run it up again. Now there is no equity in the home and they blame the lender.

I'm GLAD subprime loans have been tightened. Unfortunately there are a lot of people that are born to be renters for life.

 

Why in the friggin hell are these people given the damn loans in the first place? Not directed directly at you Freakshow but this may blow up and make
my job much more complicated.

 

There are a lot of reasons from divorces, job losses, self-employment, etc. If a person cannot refi in 12-18 months after getting a subprime, they should rent. They should also be buying houses in the 100,000 range, not 250k.

 

The lenders are willing to take the risk...they think they can make money on it. Sure, they end up selling a lot of homes (that they take through foreclosure), but there IS profit to be made. Recently they got a little too loose in the requirements.

Toro is right in what he said. If you use the loan the right way, it can help. Problem is...most seem to need these loans because they are fucking stupid. Should the governmet outlaw these loans because some of us can't manage our lives? I really think that over all they cause more harm than good for the consumer. If you use it right...no problem. Just like alcohol. Do you outlaw that because some people abuse it?

 

I'm guessing subprime notes can be budled and sold as MBS. If so, then the notes are off the lender's books and their risk is greatly diminished. Is this correct?

 

Correct. 100%. It's BIG business. Barclay's bought Equifirst...Lehman owns Aurora...Wachovia just invested a couple of billion bucks in Novastar...the investment bankers want this business.

Problem they've had over the last 6 months or so...people have been defaulting within the first 3-4 months. Generally the lender has to buy the loan back if this happens. That's why so many subprime lenders got hammered!

 

Yea, one of the banks around here had that happen and a couple of hedge funds are close to folding due to the subprime mess. Maybe lenders will learn something from this, but I doubt it. I blame Wall Street. Focusing on quarterly profits instead of long term profitablity is stupid. I guess that's a topic for a different thread though.

 

I had a man in my office the other day that filed chapter 7 after his real estate business went up 4 years ago. He was wanting to purchase a 420,000 house. First of all, I steer clear of chapt. 7 cases. If it was chapt. 13 I might consider it, at least with that he would have made an attempt to repay some of his debt. Second, why would an individual who is trying to rebuild his credit want to get himself into a 420k house? That's just stupid. His income was decent for the past two years but what's to say he wouldn't default again?

 

I wouldn't have touched a bankruptcy with a ten foot pole. One of the 5 C's of credit is character and a bankruptcy speaks loads about character. Yes, there are some circumstances when it's unavoidable, like medical situations, but those cases are in the minority. I'd be curious to know what this guys credit score was.