Subprime Mortgage Lending – Expanded Guidance

In June 2007 the federal financial regulatory agencies together issued a Statement on Subprime Mortgage Lending.  This statement contained references to an earlier document issued by the Comptroller Office’s for Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.  The latter document, the 2001 Expanded Guidance for Subprime Lending, is recommended unequivocally by the agencies as the defining document to which lenders should turn to find the criteria for considering a borrower “subprime”.

Even in the late 1990s, subprime lending was becoming more and more of a problem. The 2001 Expanded Guidance was an expansion of earlier statements about this issue. The agencies’ focus was the responsible use of subprime lending to assist subprime consumers to win back their credit ratings. Regaining lost credit would enable these people to enhance their financial situations.  At the same time, the agencies stressed that lenders who assume a greater risk by lending to subprime individuals must also show evidence of ability to maintain their duty of upholding the public’s trust in financial matters.  It is the lender’s responsibility to assess most carefully whether or not the borrower is likely to be able to repay the debt incurred.  Painstaking effort is required to create strict rules of underwriting to assist in such assessment. Only when controls like this exist will both borrower and lender enjoy minimized risk of loss.

This Expanded Guidance clearly defined for the first time the criteria used to decide whether a potential borrower will be classified as “prime” or “subprime.”  It states that at least one of these issues will characterize a borrower as subprime when the person applies for a loan:

·  Low credit score

·  Bad credit history, including

·  collection accounts

·  repossessions

·  late payments of invoices

·  bankruptcy

·  debts that have been written off as uncollectable, called “charge-offs”

·  high ratio of debt to income

·  decreased ability to pay off the loan.

Further, the document describes these attributes of the subprime borrower:

·  has a Fair Isaac Corporation (FICO) credit score of less than 660;

·  has collection activity, liens, charge-offs, or judgments within the past two years;

·  within the past year, has had two late payments;

·  within the past two years, has made a payment that was more than 60 days late;

·  has a ratio of debt to income of at least 50%;

·  has declared bankruptcy in the past five years;

·  has been assigned a score by another credit rating service that would equate to a FICO score of 660.

All lenders use these standards to identify subprime borrowers.  Bear in mind that even if you have a FICO score that is better than 660, you will still be considered a subprime borrower if you possess a single one of the attributes listed above.

Expanded Guidance offers a clear definition of lending practices to be considered “predatory.” The agencies in no way insinuate that predatory lending practices characterize all subprime lenders. In fact, it is their belief that benefits for both the borrower and the lender come from using subprime loans that are administered properly.  Nonetheless, the public should be made aware that predatory lending practices do exist, and that borrowing at subprime may leave them vulnerable to such practices.  In predatory lending, the exchange between borrower and lender is very unequal: the lender gets the borrower’s money and the borrower gets not much of anything!

Most  predatory lending practices fall into three categories.

·  Many car loans and housing mortgages are made based on assets pledged by the borrower as collateral, rather than on the borrower’s actual ability to fulfill the debt.

·  “Loan flipping” occurs when a lender coerces or talks a borrower into refinancing a mortgage, at no advantage to the homeowner, but at great advantage to the lender, who may collect sizeable fees for the transaction.

·  Failing to reveal to the borrower all the hidden fees and costs of a loan, and concealing information or providing fraudulent information to the borrower.

·  Very often, these practices are perpetrated on vulnerable borrowers, like the elderly, minority homeowners, or low-income families. In many cases, these people would actually have qualified for a mortgage at prime rates; but they are at a disadvantage because of their lack of knowledge.

If you are thinking of borrowing at subprime for a mortgage, you should familiarize yourself with the 2001 Expanded Guidance for Subprime Lending.  It is available on the Internet, and is definitely worthwhile reading. It laid a fine foundation for further definition of the responsibilities of subprime lenders and the needs and rights of subprime borrowers.

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Investment Business Loan and Commercial Mortgage Help

Many business borrowers do not prepare adequately for the commercial mortgage business loan problems that are common in most business financing scenarios. By anticipating typical commercial loan difficulties, business owners are more likely to avoid potentially disastrous business finance consequences.

With rapidly deteriorating financing for residential investment property, overcoming business loan and commercial mortgage problems is even more important. This summary provides an introduction to four critical commercial loan factors and should assist commercial borrowers to better anticipate key business financing difficulties.

It is not unusual to find that business investment lenders and business loan brokers are not as forward-looking about business financing and investing difficulties as most borrowers would expect, and I have published another article about commercial lenders to avoid. The focus here is on four typical commercial mortgage loan and SBA business loan difficulties often overlooked by commercial lenders and borrowers.

Commercial borrowers should be prepared for commercial loan scenarios that involve unexpected business financing problems. With business financing there are several key commercial mortgage problems which should be avoided. Business loan problems are more serious and prevalent than many borrowers would imagine.

Some of these commercial mortgage business loan difficulties might be unavoidable, but in most cases these business financing and SBA loan challenges can be successfully overcome. Commercial borrowers will be poised to take proper corrective action if they are aware of common commercial loan difficulties.

Avoidable Commercial Real Estate Investment Property Financing Scenario Number One: Use of secondary business financing -

Many commercial borrowers want the flexibility to use subordinated debt (a seller second or other secondary financing) in order to acquire a commercial property or business opportunity investment with a smaller down payment. Many forms of business investing will not permit a seller second or other forms of subordinated debt. With a commercial loan via non-traditional business lenders, a commercial borrower can use subordinate business financing (including seller seconds) to reduce the amount of their down payment.

Commercial Mortgage Example Number Two: Sourcing-seasoning assets and seasoning of ownership -

Some commercial lenders will require borrowers to document the source of the down payment for a purchase (sourcing). Many business lenders require borrowers to document where down payment money is coming from, often for up to 12 months in order to provide seasoning confirmation. Ownership seasoning is determined by establishing a minimum period for ownership prior to being eligible for refinancing.

Such a problem will probably not deter all borrowers. When it does apply, business borrowers should insist on a lender without seasoning and sourcing requirements.

Business Financing Example Number Three: Commercial mortgage recall terms -

Business loan recall conditions will often allow the commercial lender to force the borrower to repay their loan before the normal loan expiration. If a commercial loan agreement does not include recall terms, such a possibility is not of immediate concern to a borrower.

Commercial lenders will routinely include recall conditions in a business loan agreement. The provisions which will prompt a recall will vary and typically include annual business lender monitoring of financial statements, tax returns and credit history. Without agreed income, tax returns and credit standards, the lender can choose to require the borrower to pay off the commercial loan within a very short period of time.

Contingency Plans for Business Finance Recalls: What to do about a commercial loan recall -

To avoid an unanticipated recall scenario, commercial borrowers would be wise to consider only commercial loans which do not have recall terms. For commercial borrowers who have recall provisions in their business financing agreement, it will be equally wise to consider refinancing their business loan or commercial mortgage before a recall occurs so that refinancing is accomplished when it is most appropriate for the borrower.

When borrowers receive a business financing recall, they must quickly obtain refinancing assistance. When reviewing commercial loan choices for refinancing, borrowers should attempt to exclude potential lenders that require recall terms.

Business Loan Example Number Four: Business financing that needs a long-term commercial loan -

Is long-term investing and financing really possible for a business loan? Some business investment lenders will only offer 5 years (or less) before commercial real estate financing will expire with a balloon payment due.

There are commercial mortgage programs which can provide long-term financing, even though many lenders will only offer shorter-term options for investment business financing. Longer-term commercial real estate financing will often be the critical difference that facilitates a successful business investment because a new business loan will not be required for many years and commercial loan payments will also be reduced.

Additional Commercial Loan Problems and Solutions -

Unfortunately commercial borrowers will frequently encounter commercial mortgage business loan problems similar to those described here. To better prepare for this, an advisable approach is to explore business financing resources that will facilitate a better understanding of complex commercial loan issues. The Commercial Real Estate Loan Guide and The Working Capital Management Guide are two examples of business finance resources that will provide possible solutions for many difficult commercial financing situations.

Technorati Tags: Business, Commercial, Help, Investment, Loan, Mortgage

Subprime Mortgage Lending – What are Its Effects?

ubprime lending is really nothing new. It was originally designed to enable people with less-than-sterling FICO scores to purchase homes, cars, and other items for which they couldn’t get conventional loans. Also known as “second chance” lending, its purpose was to provide responsible individuals with a second chance to become homeowners. In the mid-1990s, with real estate values continuing to climb, subprime lending became very popular. Unfortunately, many of the people who got involved with subprime lending were not really responsible, or did not fully understand what they were getting into. Some of them interpreted subprime lending as a means of buying a house without a down payment; others saw it as a means for entering a real estate market that was changing very rapidly. Subprime lending was never intended for these purposes.

You can see the effects of misuse of subprime lending in real estate markets all over the United States. For example, people who have bought homes during the last few years using subprime lending usually have not been able to provide a down payment of 20% on their purchase. Private mortgage insurance (PMI) is required in such cases. Private mortgage insurance is available at additional cost to the buyer, above and beyond the required homeowners insurance. With PMI, the lender has a guarantee that if the buyer defaults on the loan, the mortgage amount will be repaid to the lender. The cost of PMI is now deductible from the buyer’s income tax!

Defaults on subprime loans are becoming more and more common. One reason for this increase in defaults is that, lulled by the ready availability of subprime lending, many people have purchased homes they really cannot afford. Some of these are carrying adjustable rate mortgages (ARMs), which are readjusted every couple of years – always upward. In past years, someone who was interested in an ARM needed to qualify not only for the initial rate, but also for two subsequent upward rate adjustments. In recent years, this has not been true. These ARMs have been offered at extremely low introductory “teaser rates,” and those who qualified for the introductory rates were not required to qualify for subsequently adjusted rates. Rates have gone up by several percentage points. Mortgage rates for many people have nearly doubled. In combination with the record high cost of gas and oil, along with steadily rising prices for food and commuting by public transportation, this means that large numbers of families are unable to continue to pay on their subprime mortgages.

Another effect of easily-available subprime loans is that many people who knew nothing about real estate or property management decided to buy real estate. One reason real estate prices were driven to levels that were both unrealistic and unsustainable is that “flipping” properties had become common. This means that people were purchasing real estate, “fixing it up” a bit, and then reselling it for a very good profit. In time, these artificially high “bubbles” burst. Prices fell suddenly and dramatically, and these inexperienced individuals found themselves with property they had bought with the intention of reselling quickly — and with no buyers. The value of many of those properties is less than the amount owed on them. Foreclosures are rampant. Foreclosure sales in a particular neighborhood reduce property values in that neighborhood still more. This kind of cycle is not easy to break.

Subprime lending, then, can be an excellent way to provide a second chance to restore credit and to purchase a home. On the other hand, its effects can be very dangerous if they encourage inexperienced individuals to jump into a rapidly-changing real estate market. Be sure you understand the expected effects before you take any action involving subprime lending!

Technorati Tags: Effects, Lending, Mortgage, Subprime