WHY SUBRIME LOANS WERE NEVER NECESSARY
January 29th, 2009I guarantee you that if you turn your TV on to CNN, FOX News, or even KRWX? Local News all you will end up hearing about is foreclosure here, subprime that, predatory lending this, and recession recession recession! Little do the victims of these predatory loans know that it was not even necessary to sign on a subprime loan to qualify in the first place. This is why:
Subprime loans were “designed” to qualify buyers with credit scores usually below a 620. Many of these buyers, based on old subprime guidelines, had to have a minimum of a 580 credit score to purchase a home with ZERO down. Pretty crazy huh? Not exactly.
I am going to compare the guidelines of a typical subprime loan in the past to that of today’s FHA loan.
Typically, a minimum credit score of a 580 was usually needed in order to qualify for high loan to value loan amounts. Today, FHA also requires a minimum of a 580 credit score to qualify. Most subprime loans had maximum collection amounts and required rental history if never a home owner. FHA on the other hand does not require rental history and rarely asks for collections to be paid as long as they were not active within the last year. So what’s my point?
Today’s FHA mortgages are yesterday’s Subprime mortgage. Or is it, today’s FHA mortgages should have been yesterday’s FHA mortgages? The Federal Housing Administration (FHA) was created by Congress in 1934. So why is it that all these mortgage brokers and bankers were originating Subprime loans this whole time when FHA was available? Greed or ignorance?
The answer is: BOTH, but mostly IGNORANCE. During the subprime days any Joe Shmoe could easily get their loan officer’s license, get employed by a mortgage broker, and start originating loans with absolutely no experience or training. The problem was that most of these mortgage brokers who were employing these newly licensed loan officers trained them on subprime loans because that was what they knew. They sold easy stated income loans that required less work and never did their homework. Was greed involved? Yes it was. They overcharged on the Good Faith Estimate fees and also on the rate to make more Yield Spread Premium. Now, I think if these mortgage brokers were not ignorant to begin with, their greed would have actually BENEFITED the real estate industry. How?
The irony here is that FHA loans actually pay MORE in commission than subprime loans! How? Well during the dark age of subprime lending, a typical subprime loan would either be on a 30 year fixed or Adjustable Rate Mortgage with interest rates ranging from 7.5% to 12%. Of course the higher the rate, the more the lender will pay commission in Yield Spread Premium to the originating loan officer. On average, loan officers would make between 1 to 2 Yield Spread Premium percentage points. An FHA loan on the other hand can pay a mortgage broker or mortgage banker the same if not double what a subprime loan would pay, except that the rate would be in the 5’s! So why didn’t mortgage brokers and bankers originate FHA loans? Either one, because they didn’t know about FHA or didn’t know how to originate them, two because most loan officers were self employed contract employees and FHA only allows for W2 employees, or three because their mortgage broker or banker was not licensed to originate FHA loans.
The lesson learned: Knowledge goes a long way in this industry. For those buyers reading this article, please make sure that your mortgage broker or banker knows this business! Make sure he is not just another Joe Shmoe trying to make an extra buck without truly earning it.
Best,
Danny Nassar