I came across a couple of interesting articles yesterday regarding subprime mortgages. The first article, Wow, I Could’ve Had a Prime Mortgage, was enlightening. It seems that people who didn’t know any different were given subprime mortgages even though they qualified for a prime mortgage. OUCH! Why would such a thing happen? Well, this portion of the article explains why (bold emphasis mine):
Some consumer advocates blame loan officers and mortgage brokers who steer borrowers away from prime loans because they can make much more money from the subprime market.
“Dollar for dollar, it is much more lucrative for a broker to sell subprime loans,” said Allen Fishbein, a director of credit and housing policy for the Consumer Federation of America.
“I have a friend who interviewed for a job with my company,” said Hardester. “He told me, ‘I’m not coming to work for you. I can’t make enough money.'”
The friend, who had been working in the subprime industry, told Hardester he was used to getting an average of five points-plus for each loan he originated; that’s more than $10,000 on a $200,000 mortgage. Hardester’s company writes mostly prime loans, where the margins are much thinner – around 1 percent or less.
There’s your motivator right there: money. When a broker can make $8,000 more by selling a crappy product than he can make selling a decent product, he’s gonna sell the crappy product. Forget about doing what’s best for the client. Sell the product first and then justify it later. Most of the brokers who sold these subprime mortgages did nothing wrong legally. However, one has to question their ethics, especially if the client qualified for a prime mortgage but was sold a subprime mortgage.
The second article I read was a front-page story in the Wall Street Journal titled ‘Subprime’ Aftermath: Losing the Family Home($). The article profiles several families from a neighborhood in Detroit. The article made me angry for two reasons:
1. How could people be so stupid (or niave)? and…
2. How can lenders justify these types of loans?
Here’s the story of one lady and her husband:
April Williams was feeling the pain of the downturn back in 2002, when she saw an ad from subprime lender World Wide Financial Services Inc. offering cash to solve her financial problems. At the time, production slowdowns at Ford Motor Co. were squeezing her husband’s income from an assembly-line job, and they’d heard rumors that more cutbacks were coming. Still, after a loan officer from World Wide paid a visit, they became convinced they could afford stainless-steel appliances, custom tile, a new bay window, and central air-conditioning — and a $195,500 loan to retire their old mortgage and pay for the improvements. The loan carried an interest rate of 9.75% for the first two years, then a “margin” of 9.125 percentage points over the benchmark short-term rate at which banks lend money to each other — known as the London interbank offered rate, or Libor. The average subprime loan charges a margin of about 6.5% over six-month Libor, which as of Tuesday stood at 5.38%.
“I knew better than to be stupid like that,” she says. “But they caught me at a time when I was down.”
It would be nearly impossible for most people to afford that! According to Bankrate, the current six month Libor rate is 5.38%. So, after two years, this lady was going to be paying around 14.51% interest on her mortgage (9.125 + 5.38 = 14.505). For the first two years she would be paying over $1,679 per month, which would jump to $2,376 per month (that’s over $28,000 per year)!
Something I would like to know is whether or not she knew all of this information? I can’t imagine anyone signing up for something like this if they knew these numbers. Regardless, she was incredibly niave to get suckered into this deal.
That’s just one of the many stories regarding this mess. I have a feeling that we are only seeing the beginning of this.
Oh, and here’s a little message for the mortgage brokers who hawked these loans: Enjoy it while you can because everyone knows that a man reaps what he sows.