Understanding The Issues: Subprime/Housing Crisis

I gotta go w/ McCain on this:

I've been a loan officer w/ a mortgage banker for 7 years now. To hear some politicians talk, I wonder to myself whether they really know what they're talking about. They broadly talk about ARM's adjusting higher and broadly talk about people who can't afford they're housing payments.

A "normal" conforming ARM is actually a decent performing product. Right now if you have a 5 yr fixed ARM this is getting ready to adjust (you're on the 6th yr), you would adjust to 5.875% or 6% most likely. Not bad. Then next year you'll adjust again depending on what short term rates are doing. You can also refinance if you choose.

Alot of the loans in question are subprime loans...riskier higher interest rate loans. There are usually 3 options, a fixed, a 2 year fixed arm, and a 3 year fixed arm. The borrower has a 2 or 3 year window to fix their credit to refi to a conforming, market interest rate. Now, if the borrower doesn't fix there credit they have to keep there loan and let it adjust which generally adjusts MUCH higher. That's the issue. Now virtually all subprime lenders are extinct now. I've probably done 3-4 subprime loans in 7 years as a last resort. I laid it all out there to tell them they had to keep there credit up or there wouldn't be any other options.

Then there are the Payment Option ARM's. They were supposed to be marketed towards the wealthy, upper class, instead the were used to qualify persons who wanted a home larger than they could really afford. Usually a few options...pay a 30yr fixed payment, 15 year fixed, Interest only, OR pay the minimum payment which was usually a low % rate of 2 or 3%. The kicker is the min payment is a negative amortization loan where you balance goes up each month. So all of those commercial you heard about a $200k house for $500/mo...there you go.

Once your credit goes..it leaves you w/out options. Multiply that w/ declining value you have a problem.

I'm not saying that lenders aren't to blame and i'm not saying some loan officers aren't to blame but i don't think the gov't should jump in and help every consumer out there. I think unfortunately we've got to let this thing correct itself and it will.

As a lender, i've always taken alot of pride in the fact that i make recommendations to people that come to me. I tell them what i would do. I tell them to make sure that you are comfortable w/ your payment no matter what i can qualify you for and i can qualify you for more than you want to pay. I've never done a Payment option ARM (not that they are always bad). I have done loans where i've counseled persons and qualified persons on loans they've said they could afford where in reality i've wondered how they are going to do it.

My two cents i guess.

great post. you learn something every day here at Warpath U.

I gotta go w/ McCain on this:

I've been a loan officer w/ a mortgage banker for 7 years now. To hear some politicians talk, I wonder to myself whether they really know what they're talking about. They broadly talk about ARM's adjusting higher and broadly talk about people who can't afford they're housing payments.

A "normal" conforming ARM is actually a decent performing product. Right now if you have a 5 yr fixed ARM this is getting ready to adjust (you're on the 6th yr), you would adjust to 5.875% or 6% most likely. Not bad. Then next year you'll adjust again depending on what short term rates are doing. You can also refinance if you choose.

Alot of the loans in question are subprime loans...riskier higher interest rate loans. There are usually 3 options, a fixed, a 2 year fixed arm, and a 3 year fixed arm. The borrower has a 2 or 3 year window to fix their credit to refi to a conforming, market interest rate. Now, if the borrower doesn't fix there credit they have to keep there loan and let it adjust which generally adjusts MUCH higher. That's the issue. Now virtually all subprime lenders are extinct now. I've probably done 3-4 subprime loans in 7 years as a last resort. I laid it all out there to tell them they had to keep there credit up or there wouldn't be any other options.

Then there are the Payment Option ARM's. They were supposed to be marketed towards the wealthy, upper class, instead the were used to qualify persons who wanted a home larger than they could really afford. Usually a few options...pay a 30yr fixed payment, 15 year fixed, Interest only, OR pay the minimum payment which was usually a low % rate of 2 or 3%. The kicker is the min payment is a negative amortization loan where you balance goes up each month. So all of those commercial you heard about a $200k house for $500/mo...there you go.

Once your credit goes..it leaves you w/out options. Multiply that w/ declining value you have a problem.

I'm not saying that lenders aren't to blame and i'm not saying some loan officers aren't to blame but i don't think the gov't should jump in and help every consumer out there. I think unfortunately we've got to let this thing correct itself and it will.

As a lender, i've always taken alot of pride in the fact that i make recommendations to people that come to me. I tell them what i would do. I tell them to make sure that you are comfortable w/ your payment no matter what i can qualify you for and i can qualify you for more than you want to pay. I've never done a Payment option ARM (not that they are always bad). I have done loans where i've counseled persons and qualified persons on loans they've said they could afford where in reality i've wondered how they are going to do it.

My two cents i guess.
I would think that most loan officers handle things like you but the post here make it seem like your only % of loanofficiers and most are slime.

With an ARM does the person have to qualify for what the estimated rate will change to when the ARM is up?

Also where are you located? The call on my comercial loan is comming up and I'm going to need to refinance my building in two months.

I would think that most loan officers handle things like you but the post here make it seem like your only % of loanofficiers and most are slime.

With an ARM does the person have to qualify for what the estimated rate will change to when the ARM is up?

Also where are you located? The call on my comercial loan is comming up and I'm going to need to refinance my building in two months.

most of the ones i know aren't slime. generally the loan officers at real estate offices are helpful.

the slime balls (like american mortgage i think) were just a group of unassociated brokers and their only revenue stream was screwing people over. all of those offices are closed now, though that doesn't mean every broker is going to be looking out for you.

the only time you'd ever really consider neg am is if you were in a bubble/speculatory market where you thought prices would double in a year or two and you could use them to buy in without a lot of cash on hand. even then it might not be recommended to over-leverage oneself like that.

Not that I'm an expert, but I'm pretty sure the borrower does not have to quality for the potential adjustment, because it's not an absolute. Most ARM interest rates cannot exceed an x% increase year to year. So essentially the borrower should do their homework and make sure if they can't refi the ARM, that they can afford the payment with the increased interest rate before even thinking about signing the bottom line.