Subprime Mortgage Lending - Pieces of the Puzzle

The current housing market is disastrous. More than that, it is also something of a puzzle. There are several elements that have worked together here. If you understand each of these elements, you'll see how they fit together, and how the puzzle has grown. We should hardly be surprised that subprime mortgages are being foreclosed at a great rate. How in the world did we let ourselves get into this situation? Read this article, and then you decide.

The "prime" rate is the rate charged by all banks in the country. The prime rate doesn't change regularly or often, only when 75% of the country's top 30 banks decide they need to change it. People who have a decent credit rating are usually given mortgage and other loans at prime rate.

Subprime borrowers are people who probably have pretty poor credit ratings. They may have a history of bad financial management, perhaps including collection accounts, repossessions, maybe even a bankruptcy. At any rate, they are perceived to be more likely than the average borrower to default on this loan. A subprime lender exists to lend money to borrowers who are not expected to act responsibly in the repayment of the debt. The interest rate that a subprime lender charges will be higher than usual because of that increased risk of default. Subprime lenders know about the risk; they fully understand that these borrowers cannot really be counted on to repay their debt. Why should they be surprised when it turns out exactly the way they expect it to?

Lending takes place when one business or individual lets out money to another business or individual, for a defined period of time, and at a specified rate of interest. When you're talking about a mortgage, it might be – for example – a fixed-rate loan for 30 years, at 5.7% interest. (The annual percentage rate is referred to as the APR.) This is a common type of mortgage: the borrower agrees to pay the lender back over a period of 30 years, at a yearly 5.7% interest rate.

So there are three elements of the puzzle: borrowing, subprime, and lending. What else has contributed to the current situation? Lending practices of dubious quality joined with a huge number of subprime borrowers whose ability to repay their loans was questionable. Yes, we are definitely in a mortgage crisis; foreclosures have never been higher. Whose fault is that?

When a homeowner falls behind in monthly payments on a mortgage, the bank takes notice. If payments are not made for three months, generally the process of foreclosure is initiated. This is a lengthy and costly process that often spans many months. The home is foreclosed and the property is repossessed by the bank.

Actually, the bank would prefer the borrower to repay the debt rather than have to take the property. A bank is not a real estate company. There is also the risk of censure from the federal government if too many of their loans are defaulted upon. For these reasons, foreclosures can take a very long time. The bank is in no hurry.

The majority of subprime mortgages are nowhere near as easy to understand as the example we gave above. Lenders have gotten more and more creative in the last few years, in an effort to attract more subprime borrowers. Many of these borrowers are now carrying an adjustable rate mortgage (ARM). The initial low interest rate of these loans allowed lots of people to get involved in a loan for which they might not have qualified otherwise. When the loan resets in about two years, the interest rate usually goes up considerably. In addition, some of these loans have prohibited refinancing in the first several years.

Borrowers, subprime mortgages, lending, and foreclosure have all worked together to give us this picture. Contributing in addition were falling house prices, rising mortgage payments, changing real estate markets across the country, difficulty of finding accessible mortgages, and a glut of houses for sale on a market where few people are buying. Here's the completed puzzle: the mortgage mess.

Subprime Lending: Trojan Horse Of The Home Loan Lending Industry

Home loan lending used to be relatively simple. Lenders were so hungry for business they readily accepted no-down mortgages, interest-only loans, and E-Z refinancing for borrowers with bruised credit. Recently, however, a wave of bad loans wiped out small independent mortgage brokers, devastated bad-credit lenders, and prompted the industry itself to tighten lending practices.

Today, it has become harder than ever for cash-strapped would-be homeowners to obtain home loan lending.

Who Is To Blame?
Experts blame subprime lenders for the recent home loan lending debacle. In the past, people with poor credit scores or large debts and modest incomes would not have been granted a loan. In recent years, however, a new breed of mortgage brokers - called subprime lenders - burst onto the market. Instead of denying loans to people with poor credit history, they let these people take out mortgages and then charge them higher interest rates to offset the high risks associated with the loans.

Such action on the subprime home loan lending front enabled a huge part of the population to own houses. Subprime home loan lending morphed dramatically from a start-up business into a $600-billion-a-year enterprise. The problem with high risks, however, is that they either pay off magnificently or go bust, and this is just what happened. The subprime market fell, and it was not long before homeowners who financed their purchase with subprime loans found themselves with foreclosure notices in their hands.

Stringent Loan Standards
When applying for home loan lending, expect more than run-of-the-mill scrutiny. The industry is cracking down on the so-called "liar loans." These are mortgages obtained without verification of the buyer's declared income, under a "stated income loan" or "no documentation loan."

Additionally, the home loan lending industry has become more conservative in attaching value to houses. Before, bankers generously appraised homes for so much more than they're worth. Today, the appraisal is based not on the recent market value of similar homes but on worst-case scenario market pricing. Worst-case scenario value is not the amount a house can be sold for, but the amount it will fetch once it goes into foreclosure.

The Silver Lining
That home loan lending implements stricter regulations is sure to dismay everyone, from borrowers to lenders . However, three good things can come out of this. First, inexperienced and even fly-by-night mortgage brokers will be driven out of business, leaving the home loan lending market to legitimate lenders. Second, with lenders no longer eager to grant high-risk loans, there will be more money and better rates for borrowers with sufficient downpayment and good credit. Finally, fewer high-risk loans that never should have been granted in the first place will be floated into the market. This will result in fewer homeowners being dismayed and losing their homes due to inability to meet payments.

Every story has a moral, and this article contains only one. If something sounds too good to be true, it probably is too good to be true. So when buying a house, do not be tempted to take shortcuts. Go the longer but perfectly legitimate and business-sound home loan lending route.

Subprime Mortgage Lending: What’s it All About?

There's a lot of talk in the media these days about subprime lending. Do you really know what it is? Essentially, subprime lending means loaning money at a rate of interest that is usually much higher than the "prime" rate. In the United States, the most frequently used prime rate is the one established by the Wall Street Journal (WSJ). This is the interest rate on corporate loans currently posted by at least 23 of the 30 largest American banks. The prime rate doesn't change regularly, only when three-quarters of the banks decide they need to change it!

And how might subprime lending affect you? If you have a generally poor credit rating (under 620 on the FICO scale), you are considered a greater credit risk to a lender. You're perceived as more likely than others to default on your loan. To compensate them for taking a greater degree of risk with their money, subprime lenders charge a significantly higher rate of interest. If you are classified as a subprime borrower, bear in mind that when you need to borrow money, your best bet is not a regular bank, but an organization specializing in subprime lending.

The problem that faces the American public right now is that several years ago people began borrowing more than they could afford to repay. The real estate market appeared solid a few years back; home values were steadily rising. As much as 125% of the value of a home was available for borrowing to the owner. People who opted for subprime mortgage loans expected that the value of their homes would keep rising, and within the next 3-5 years they could refinance once again. Some other types of mortgages that suddenly became popular were negative amortization mortgages, 80/20 mortgages, and interest-only mortgages. These left many homeowners owing more on their mortgage loans than their properties were worth, as the housing market began its sharp decline. These people thus found themselves with "negative equity" in their homes.

Adding to the present subprime lending problem is the fact that many of these homeowners hold adjustable rate mortgages (ARM), which are continually readjusting – and always upward. Although most of these ARMs have a cap of some sort, preventing them from limitless increases, they generally have long-term rates. Many people have found that their mortgage payments have nearly doubled over time, with the continual readjustment of their rates. Simultaneously, we are experiencing record costs for gas and oil, and greatly elevated food prices, making it more and more difficult for many families to make monthly mortgage payments. Once a family is in arrears by three months on mortgage payments, they can expect foreclosure proceedings to be inaugurated by the bank that holds their mortgage. The problem is further augmented as neighborhood real estate values drop, due to the foreclosure sales of some homes.

After reading this description about the subprime lending trouble, assess your own situation. If you believe you may be in trouble, you should discuss the matter with your lender. Sometimes lenders are willing to offer various forms of relief to overextended borrowers, rather than have the bank foreclose on the mortgage. If, on the other hand, your mortgage is up to date and your payments are being made in a timely fashion, don't worry. Keep yourself informed, and keep focused on your budget. Most importantly, whatever your position, do not panic!

Credit Lending is Down in June

The Bank of England has just released its statistics on lending to individuals for June - the report includes figures on net lending secured on dwellings - which is broken down into house purchases and remortgages.

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The report will be of interest to those SME owners and managers whose lines to credit are similar to those of households and individual consumers.

While total net lending to consumers is indeed increasing it is slowing - giving more and more substance to the phrase UK citizens have all now become familiar with - the credit crunch.

Further slowdowns in the growth of credit provision can be expected in the coming months as lending institutions remain cautious. A report today released by the Treasury expects the shortage of mortgage finance to persist until at least the end of 2010.

Overall lending

The total net lending to individuals in June stood at £4b. Mays total was £5.1b representing an increase of 0.3%. The increase between April and May was 0.4%. A slowing trend has been recorded for the past 4 months.

When compared to the same period last year it would appear that the growth in lending stood at 7.4% - year on year this is lower than the figures for the past 4 months. The year on year growth for March stood at 8.7%.


Housing market also slows - govt may step in

In all the increase in net lending secured on dwellings was £3.1 billion, this figure is below the increase in May and the previous six-month average. These figures will come as no surprise to a housing market that is starting to see house prices stop rising and in some circumstances fall as a result of tighter credit lines.

The numbers of loans approved for house purchase stood at 36,000, remortgaging at 84,000 and other purposes 45,000. All figures were lower than in May.

The government in recognising the housing market crisis has indicated that they may have to give a taxpayer guarantee to billions of pounds of mortgage market bonds.

This comes with a report commissioned by the Treasury that has suggested possible options to reviving the housing industry through stimulating the mortgage market.

The assessment of the outlook for mortgage finance is due to be published later by Sir James Crosby, the deputy chairman of the City watchdog, the Financial Services Authority.


Credit cards

The increase in net consumer credit in June was £0.9b which is below that in May and the previous six?month average. Net credit card lending rose by £0.4b also below the increase in May.

The annual growth rate of consumer credit slowed by 0.2 percentage points to 6.8%; the three-month annualised growth rate fell by 0.6 percentage points to 5.7%.

Subprime Mortgage Lending - 2007 Statement

The United States Treasury Department, along with several other federal financial regulatory agencies, released a Statement on Subprime Mortgage Lending in June 2007. This sizeable document (it is 31 pages long) is aimed at people involved in borrowing and lending for mortgages at subprime rates. Of particular concern to the authors are adjustable rate mortgages (ARMs). The Statement provides guidelines that will ensure more appropriate practices regarding ARMs. The agencies are concerned that lenders persuade borrowers to take out ARM loans by giving them an extremely low rate of interest (called a "teaser rate") for the first few months. Unfortunately, this rate adjusts upward very soon to a formula based on and exceeding the prime rate. Now the loan is no longer within the means of the person who is classified as a subprime borrower, and it will cause extreme financial hardship. Other issues covered by the Statement are below.

Adequate documentation of income for subprime borrowers is not always required by lenders. This practice is of concern to the agencies because it leads to so-called "liar loans." A borrower can put whatever inflated number he chooses on the application form, knowing there will be no effort to verify that this is truly the amount of his income. These loans greatly increase the chance that the borrower will default, which is a problem for the lender as well.

The agencies also address the problem of the introductory rate period. Most ARM loans include significant penalties for early prepayment, and the penalties extend well past the initial period. In addition, borrowers are not always given full information about additional monthly payments that will be required, such as taxes and homeowners insurance. This failure to disclose such information leaves the borrower at an enormous disadvantage, and will no longer be permitted.

It is interesting and unusual that, three months before releasing the Statement on Subprime Mortgage Lending, the agencies involved in creating it requested comment from the public, from members of Congress, and from financial institutions that engaged in mortgage lending. From the industry came the comment, over and over, that they are opposed to disclosing to borrowers all the details of ARM fees and rates. They think that would result in "overloading the consumer with information"! This is of great concern to the agencies, and to the author of this article as well. We don't think the average consumer requires the protection of subprime lending agencies from information overload. Consumers can handle information just fine! Failure to disclose costs and fees for which the borrower will be responsible is nothing short of deception.

Virtually all comments reflected uneasiness that there was no adequate definition of the term "subprime" within the Statement. When the final revision appeared in June, readers were requested to refer back to the definition of a subprime borrower contained in the earlier guidelines document Expanded Guidance for Subprime Lending (2001). All the pertinent characteristic are listed there, and can be used in determining whether a particular borrower should be classified as subprime.

The Statement also requires that every borrower be given a full repayment schedule, including information on amortization, and an estimate of the amount of insurance and taxes that will be applicable. This must be done whether or not the extra costs are escrowed and are included in the loan. The extra charges must be part of a mandatory and accurate calculation of the borrower's debt ratio.

The Statement on Subprime Mortgage Lending is a valuable effort to remedy some of the ailments of the current housing market, and insure that subprime borrowers as well as subprime lenders are not left with a financial disaster on their hands because of imperfect communication between them.

Subprime Mortgage Lending - Regulators Tighten Rules

The most recent regulatory report on subprime lending is the Statement on Subprime Mortgage Lending (June 2007). This 31-page document was released by the Federal Reserve and other federal financial regulatory agencies in response to the current out-of-control subprime lending market. It describes in detail the requirements made of subprime lenders for the financial protection of both the borrower and the lender.

The first issue of concern is improved communication to subprime borrowers about the real, hidden cost of their adjustable rate mortgage (ARM) loans. This kind of loan is often suggested to subprime borrowers because the introductory rate of interest is so low – so low, in fact, that it's often called a "teaser rate". Before the appearance of the government Statement, ARM loans assessed huge penalty fees for refinancing the loan or prepaying it before the term expires. Often, the penalties continued for most of the duration of the loan.

Regulators tighten rules for subprime lending in the Statement by providing guidelines requiring subprime lenders to offer full disclosure of fees and rates associated with an ARM. Moreover, they state that "liar loans," loans that ignore a borrower's capability of repaying the loan and require no documentation of earnings, must be curtailed. These liar loans are also called "stated income loans," "low-doc loans," and "no-doc loans." A borrower simply states the amount of his income, without being required to produce a W2 form or pay stubs to substantiate his statement. Based on what he has claimed, he qualifies for a loan he cannot really afford. It's clear that this practice is the cause of at least part of the subprime market problem!

The Statement is specific about predatory and deceptive lending practices – what they are, and why they must not be used. Such predatory practices often victimize those who may not really understand what they are being asked to sign, members of particularly vulnerable groups: the elderly, minorities, and first-time home buyers. It is also very clear about the fact that not all subprime lenders can be considered predatory.

If you are a subprime buyer, what do these new regulations mean to you? For one thing, you can't be entrapped in an ARM with an upcoming reset date: 60 days notice is now required. If you decide to refinance early in the loan, or if for some reason you become able to repay it early, no astronomical prepayment fees will be assessed. Lenders must now require proper documentation to verify income. This is a positive improvement, because a subprime borrower should never borrow more than he will really be able to repay. Many subprime financial institutions have gone under in recent years, simply because they ignored the critical need to determine accurately each home buyer's capability to meet financial obligations. The regulations force subprime lenders to deal more ethically with subprime borrowers. They must show due diligence with their determination of these borrowers' future solvency. Foreclosures ruin local real estate markets, as well as borrowers and lenders.

Earlier guidelines issued by the regulatory agencies have been tightened by the Statement. Some have been incorporated into its text; others, like the 2001 Expanded Guidance, are referenced. The intention of the federal agencies in tightening the rules for subprime lending is to protect subprime borrowers from lenders of questionable integrity, and to protect lenders from ruining themselves because of laxity in their underwriting practices. This document is bound to have a positive effect on the current downward-spiraling real estate market.

Predatory Lending

Were you the victim of Predatory Lending? Deceptive and predatory lending practices were all too common between 2001 and 2008, as the lawyers at www.ConsumerDebtAdvocate.net find over 90% of all loans we perform a forensic analysis on have multiple violations.  If you took out a new mortgage loan during this period of time it is highly likely that there were violations in Truth in Lending, RESPA, Section 32, or Regulation Z.  Even the best educated consumers may have been victims of predatory lending practices.  CDA's Attorney's offer a complete forensic analysis of your loan documents by a recognized expert in the field who has over 30 years of experience helping consumers. CDA uses the results as leverage to force your lender to restructure your loan terms, or as an alternative, suing to challenge the validity of the loan itself. If you win a predatory lending case in court, you will often receive your home's Deed free and clear, plus be re-paid all payments and fees you have made from the time you took out the loan.

Common Predatory Lending Practices:

?  Predatory lenders use deceptive or aggressive practices to sell   their loans, often targeting certain neighborhoods
?  Predatory lenders strip equity form homes through excessive fees without considering the borrower's ability to repay the loan, sometimes resulting in foreclosure
?  Predatory lenders use prepayment penalties and adjustable loans that increase without regard to market conditions.
?  Predatory Lenders offer you one rate and fee structure, but change the loan terms at the last minute without proper disclosures.
?  Predatory lenders may use Spanish speakers to gain the trust and confidence of Hispanic Homeowners.
?  Predatory lenders charge excessive fees, points, and interest rates.
?  If you did a "stated income" or "stated asset" loan, you likely were the victim of mortgage fraud.
?  If you are elderly (over age 65), you may also be the victim of Elderly Abuse.

Common Indicators of Predatory Lending:  

Excessive Points, late charges, and pre-payment penalties: Loan origination fees and other charges can cost many thousands of dollars, even if your were promised a "No Fee" or "No Charge" loan.  Pre-payment penalties may make it very expensive to refinance or sell your home.

High Interest rate: Victims of predatory lending pay a higher interest rate than the national average or pay an interest rate not commensurate with  their credit score.

Asset-based Lending: Rather than receiving a loan based upon your ability to repay the loan, you were given a loan based on how much equity you had and were able to pull out or pay as fees.  You may have been encouraged to "inflate" your income or it was done without your knowledge so your could "afford" the loan. They may lend you more than you could afford to repay, as the lender would get the full amount of equity if they foreclosed on your property even if the loan was small.

Misrepresentations: The loan officer may offer you one set of terms (including rate and fees) and then change them at closing. They may also misrepresent the terms such you signed.

Balloon Payment: A large sum of money due at the end of the loan that is often beyond your ability to repay, often causing you to lose the home. IT is also illegal in sub-prime loan under HOEPA regulations.

Discrimination: The lender charges a woman, older adult, or minority consumer more than a similar consumer who is not a member of that group.

What Can You Do?

There are several important documents you should have received as part of the loan process to better help you understand your loan.  Three days before you signed loan documents your lender must have provided you with a Good Faith Estimate that should outline your rate and fees.  At closing, compare this to the Settlement Statement or HUD-1. It tells you where all the money you are borrowing will go.  If there are any differences between the Good Faith Estimate and the HUD-1, make sure you agree with them before you sign.

You should also study the Truth in Lending disclosures which detail how much you are paying for your loan, what the percentage rate and APR is, and what you will owe at the end of the loan. Also review the contract to determine if there are prepayment penalties that lock you into the loan for a pre-determined period of time.  IF you feel you were a victim of predatory lending, it is critical you get a forensic review of these documents before the statute of limitation runs out. Some violations can restart the rescission clock and you will have up to three years from the time you discover the violations to address them.

Subprime Mortgage Lending : What’s Good About It?

In recent months, the media would lead us to believe that the risks and damages possible in subprime lending have ruined everyone who has chosen this kind of mortgage. While there have, indeed, been many catastrophes in this area, not all cases of subprime lending fall into this category. Some subprime lending benefits do exist.

Someone who borrows at a subprime rate pays a higher rate of interest than the "prime," or currently normal, rate of interest. Often, the only way people with a poor credit score (FICO, or Fair Isaac Corporation score) can obtain a mortgage is by borrowing at a subprime rate. But perhaps your credit history is compromised because of a past circumstance that is behind you. Maybe temporary unemployment, a divorce, or some illness in the family that ran up your bills was the cause of your credit problem. You are, nevertheless, still considered to be a subprime borrower.

However, here is some information on how you may still reap the advantages of subprime lending, even if your past credit history hasn't been the best. You, too, can get a mortgage and become a homeowner. People whose credit ratings indicate past problems are classified as subprime borrowers, simply because the risk to the lender is perceived as higher than normal. But subprime lending is sometimes called "second chance" lending, and that's because subprime lenders give responsible individuals a second chance to improve their credit. The most important thing to remember if you are one of those individuals is: do not buy a house you cannot afford! You may be told that you "qualify" for a higher mortgage on a more expensive house. Pay no attention to that information. Buy the house whose costs you know you will be able to handle.

Let's look at an example. You are currently renting a house at an amount with which you are comfortable – say, $1,000 a month. With that rental payment, you have still been able to put something away monthly toward a modest deposit on a new home. You have a rather poor FICO score, and so are classified as a subprime borrower. When you meet with a lender to discuss a mortgage, you're told that you "prequalify" for a mortgage of $300,000. Consider what buying a house in the range of $300,000 would mean to you. Besides the mortgage, there will be property taxes and homeowners insurance to pay. You'll probably want to consider a fixed-rate 30-year mortgage: what will the subprime rate on such a loan be monthly? You'll find it significantly exceeds the $1,000 you are presently paying, which is within your budget! The smart thing to do is to forget about that maximum amount for which you qualify. Don't let a broker convince you to purchase a bigger, more expensive home than you could afford. You will be able to find plentiful bargains in the present real estate market. Look for those, do the math, and find something that's not going to cost you much more than what you pay now in rent. Budget carefully, and always keep that budget in mind when you're looking at houses.

Subprime lending does have its risks, that's true. But there are benefits as well, especially for people whose credit may have been compromised. Make absolutely sure you understand everything you sign, keep focused on your budget, and you'll be one of the folks who gets a second chance through subprime lending!

Subprime Mortgage Lending - 2007 Statement on Subprime Mortgage Lending

In June 2007, the United States Treasury Department, along with other federal financial regulatory agencies, issued the Statement on Subprime Mortgage Lending. This document incorporates the Statement on Working with Borrowers published by the agencies two months previously, and is intended to supplement the recent Interagency Guidance on Nontraditional Mortgage Products. The agencies specifically targeted lenders who use adjustable rate mortgages (ARMs), addressing the necessity for appropriate guidelines in this area. One main concern for financial institutions using ARMs is the offer of a "teaser rate". This brings in a borrower at a very low rate of interest for a brief period; however, within a few months this adjusts up to a much higher rate, based on prime plus a formulary percentage. Thus an ARM is changed very quickly from an affordable product to one that subprime borrowers cannot carry without undue financial hardship. Here are some other concerns expressed by the agencies in their Statement.

A second practice of concern to agencies and addressed in the Statement on Subprime Mortgage Lending is failure to disclose fully to the borrower how these ARMs will affect future payments. In addition, so-called "liar loans" are being underwritten by some less scrupulous subprime lenders. These loans are more politely referred to as "statement of income" loans: a potential borrower simply states on an application form how much money he makes. No verification of this income is required, nor is any attempted by the lender. Such total lack of due diligence and documentation of the borrower's repay ability means that the lender assumes greater risk of default, while the borrower is more likely to fail to meet the financial responsibility. "Statement of income" loans were originally intended for people who are self-employed, and would be unable to produce pay stubs or a W2 form to substantiate their income claims. Liar loans are a clear abuse of this intention.

A third concern described in the Statement on Subprime Mortgage Lending refers to penalties for early prepayment extending far into the term of the loan. Such penalties are usually quite substantial, and are not always fully explained in advance to the borrower. Moreover, subprime borrowers are not always informed about additional monthly payments, like insurance, taxes, and closing costs that accompany the purchase of property but are not part of the loan itself.

Three months before releasing the final Statement, the agencies released it for comment from the public, as well as from members of Congress and various financial institutions. It is interesting that the lending industry's most repeated comments were in opposition to the requirement of full disclosure of rates and fees relating to ARMs. Such full disclosure was described as "information overload." We find it difficult to understand how non-disclosure of all costs connected with a loan could be considered anything other than deceptive lending practices. It is only when subprime lenders offer full disclosure and open discussion to borrowers that they will be thought of as reputable entities. To fight mandatory disclosure of costs and fees seems to indicate that they have something to hide.

Most comments on the Statement also pointed out the need for a better, more inclusive definition of the term "subprime." The final 2007 Statement references the Expanded Guidance (2001) for full criteria for considering a borrower "subprime".

The 2007 Statement recommends that the borrower be given a full schedule for repayment of the loan, including an informed estimate of associated closing costs, insurance, and taxes. This should be provided by the lender at the time the loan originates. The document also recommends that these extra charges be calculated into the borrower's debt-ratio status.

All in all, the 2007 Statement on Subprime Mortgage Lending provides excellent guidance for the many questionable practices that seem to have become intrinsic to subprime lending. It is inclusive of other earlier such statements, and refers the reader to the earlier 2001 Expanded Guidance document when necessary.

Subprime Mortgage Lending - What are Its Effects?

Subprime 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!

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.

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!

P2p Lending is the New Age Solution to Borrowing

Social lending is growing as a popular mainstream-lending platform. Where banks have failed – social lending hubs like Zopa & Prosper have successfully launched their lending services and are becoming effective community borrowing networks. One of the primary reasons being that banks charge a hefty interest rates on loans plus service charges, whilst online loans taken from a social lender tend to have lower interest rates.

According to recent studies, it can be seen that banks are continuously trying to push up the fees. This situation is not new to Australians where bank loans have become an expensive option. Australians are continuously looking for alternatives, which is in the form of cheaper banking solutions. According to a research-based report by Fujitsu Consulting, it appears that Australian banks charge, on an average, some of the highest fees in the world. According to this report by Fujitsu Consulting, a customer of an Australian Bank pays an average of $95.63 as monthly fee as compared to $55.67 in Britain, $71.79 in the US and $84.41 in Canada.
The current situation Australia is that banking customers are trying to put up a brave fight against those banks, which are charging them exorbitant fee. The most obvious path chosen by most Australian banking customers is closing of their account and charging a refund. A recent survey by NEWS.com.au found out that 44% of 1366 people were charged overdraft and 52% were charged penalty fee on credit cards. In such a volatile situation, Social lending hubs are being looked as a welcome break for all those who have been the victim of high interest rates for loans.

The Social Lending Wave

The social lending wave came in the form of Zopa in UK followed closely by Prosper in the US. Both social lending hubs are increasingly becoming popular due to their ability to offer easy loan terms as against banks, whose popularity has somewhat diminished. These social lending hubs have been developed with only one aim: which is to make a loan available to anyone without the all the unnecessary hassles of the bank or having a middleman in between. At the same time, it is an alternative investment vehicle. Both lenders and borrowers belong to the community. For lenders, it is an excellent investment opportunity where they can grow their money by lending it to another person at a lower interest rate than normally charged by banks.

The lower interest rate is due to the fact that there is no middleman and the best part is that both lenders and borrowers are allowed to decide upon an interest rate. Also known as peer-to-peer lending, the statistics talk loud about the success of this kind of lending platform. According to Prosper, they have been visited by people who have borrowed 15,000 loans at a net value of almost US$91.2 million. There has been a growth in the average loan amount as well, which has leaped from $6,100 to $7,000. As a result, a space or a market has been created for new players to enter and exploit the tremendous opportunities it offers.

Type of Loans Offered

Although not as comprehensive as banks yet peer to peer sites offer different types of loans. Zopa offers mostly unsecured and personal loans, the most popular being car loans. The top 6 loans at Zopa include:
•Car Loan
•Personal Loan
•Home Improvement Loan
•Consolidation Loan
•Short Term Loan
•Flexible Loan

At Zopa, you can borrow a minimum of £1000 and a maximum of £15000. A typical loan request at Zopa will look like this:

Borrower: Driveaway44
Amount requested: £8,040.00
Preferred rate: 4.5%

For example: If you want to borrow £5,000 over 36 months then the typical fixed rate of interest would be 7.2% APR in Zopa. Apart from this, borrowers have to pay a fee of 0.5% of their total loan value.

With the lead taken by Zopa and Prosper, peer to peer lending has started to make its way to other markets like Australia and New Zealand. Lending Hub is a social lending hub that will launch in Australia in early 2008 and you can find more information at their website (http://lendinghub.com.au). PeerMint has been founded by a small team of ex-banking professionals and is aimed at being an alternative investment platform for lenders as well as a source of loans for borrowers at much more reasonable rates than the banks currently offer.

Asset Based Lending- A Flexible and Cost Effective Way To Finance Your Business

Any kind of commercial venture needs funds to grow. An enterprise cannot survive just because it has a competitive product, a promising market or an excellent network of distribution. The foundation of all this is money.

Business owners and entrepreneurs must have sound knowledge of financing, how indispensable it is, and last but not the least, why one form of financing is considered better than another form. Even though, you are starting a very small business as an experiment, yet you need finance from an external source. Among the various options available in today's commercial world, Asset Based Lending is considered as a wise option because it is flexible and cost effective.

What is Asset based lending?

Asset based lending is a kind of a specialized loan offered to businesses, who hold assets, as collaterals to the financing companies. This provides the borrowers with high financial leverage and marginal cash flows. As just mentioned, this type of lending uses assets such as receivables and inventory as collateral for the loan. In asset based lending, the quality of the collateral becomes preeminent in determining the creditworthiness of the customer. While traditional bank relies a lot on balance sheet ratios and cash flow projections as a loan criteria, asset based lending uses a client's business assets as its primary factor for lending. As a result it usually gives a borrower far greater borrowing power than is possible through a traditional cash flow banking means.

Asset based lending is Ideal

In the contemporary competitive commercial arena, every venture needs more than one resource to survive and grow. In the absence of adequate resources, even the best performing companies may suffer either losses or face serious obstacles, in the way of its further expansion and growth. In such a scenario, asset based lending comes as a godsend grace, providing the much needed finance. It is not only cost competitive and effective, but also more versatile and flexible than most of the other lending.

Advantages of asset based lending

There are a number of advantages of assets based lending. The most important advantage is the less rate of interest as compared to an unsecured loan. What accounts for the lower interest rate is the fact that in the asset based lending; the lender's money is always safe, even in a case of a default by a borrower. The lender can always recover his money by confiscating the securities and assets of the borrower.

Asset based lending is suitable for any kind of financial expansion or growth in businesses. One can also resort to asset based lending for management of buy-ins and buy-outs, business takeovers and mergers, refinancing existing business loans as well as turnaround financing. Asset based lending is determined by the value of inventory, accounts receivables, fixed assets. The borrower gets revolving credit and term loan against the security of the assets. Usually term loan up to 40 % of the total value of assets can be sanctioned. The term loan may end between 5 and 15 years, depending on the life of the assets. Asset based lending focuses on collateral and liquidity followed by cash flow and leverage. It provides the borrower with more liquidity at the same time requiring less formal financial agreements.

Making a Profit on Investment From Social Lending Sites

The worldwide lending industry is a multi-billion dollar industry where people borrow from banks, financial institutions and other private lenders. In the last couple of years, the lending industry has gone through an evolution and has given way to social lending as the new and promising mode of lending. Also known as peer- to- peer lending or person to person (P2P) lending, one of the first companies to set the base for social lending are Zopa, Prosper and more recently LendingClub.

Zopa is considered the first social lending marketplace in the world and its roots are in the United Kingdom. With the launch and immediate success of Zopa, other similar peer to peer lenders have sprung up like Prosper in the US, Boober in Netherlands and Smava in Germany.

If you are wondering whether the P2P loans offered at the social lending sites are worth it or not then the answer is most likely yes. There is not much of a difference as far as the P2P loans from these lending hubs and from a bank is concerned. The difference lies in the fact that there are no banks, no long procedures, and no middleman and above all the entire process is transparent for both the lenders and borrowers (no more hidden hard to find loan agreements!).

The main objective of the social lending hubs is to offer an online loan with the best interest rates and to make customers feel like they are borrowing from a friend or community. This peer to peer borrowing is increasingly being seen in a new light and is being considered as a part of community borrowing (which was more traditionally offered by small local community banks).

Other benefits:

1.class, which they can add to their portfolio because it doesn't fall under an investment or even a savings account.

2.Choosing interest rates and loan repayment: There are several benefits for lenders as well as borrowers. In social lending hubs like Zopa or Prosper, lenders have the freedom and the flexibility to choose a loan repayment time period as well as the interest rate on the p2p loan.

3.Active community participation: one of the salient points is that this kind of a lending hub make borrowers feel as if they are following from an actual person and not an organization or a faceless institution. Hence it helps in developing a strong community feeling.

Lenders at any of the social lending websites have the power to set a minimum interest rate that they want to earn and can bid in an increment of $50 till $25,000 through loan listings. Borrowers can create a loan listing for a period of 3-years, and borrow an amortized and unsecured loan of up to $25,000 and also provide the maximum interest rate that they will be able to pay a lender.

The success of Zopa lies in its facts and figures. They are the largest lender today and have loaned out in excess of $930,000. The return on investment for lenders has been around 5.01%, which is healthy especially in the wake of the fact that social lending is still in its nascent stages. One of the top lenders even got an ROI of 19.8% on social lending websites.

The Lenders

By now you are probably thinking who these lenders really are? Are they banks in disguise or are they really other people? The truth is that they are really people. Let's take Zopa and Prosper for example. Both the social lending hubs are backed by Benchmark Capital who also funded eBay. Zopa or Prosper are the best alternatives that anyone can have to banks or other financial lending institutions, however they are restricted to the UK and US markets.

The current business model of Zopa is based on a 1% exchange fee that borrowers are paying them upfront. In return, Zopa is offering borrowers a better interest rate by cutting out the bank middleman. More than that, a borrower will have more control of the entire lending process and has the flexibility to establish an interest rate.

Zopa is the acronym for Zone of Possible Agreement, and its lenders include only U.K. residents who are over 18 years of age. To qualify as a lender, a person needs to have a valid bank account and a high personal Equifax credit rating. There are two restrictions for becoming a lender and they are:

•Lenders have to be individuals and not businesses.
•Lenders will not be allowed to have anything in excess of £25,000 ($47,000) in outstanding loans at a given point in time.

The American counterpart of Zopa is Prosper and they also handle maximum loan of $25,000 at a time. At this point the future of social lending looks bright as it has now hit New Zealand and Australia with the first peer to peer lending hub in Australia to launch shortly being Lending Hub (you can see their site at lendinghub.com.au and their active blog at blog.lendinghub.com.au) which will offer P2P loans with a strong community focus to ensure a truly social experience for both borrowers and lenders rather than just being a transactional online loan tool.

Bank Loan Funds

As interest rate climb most bond owners are shaking their heads. The price of existing bonds falls when rates are on the rise. There is a way to offset the decline. You can invest in bank loan funds also known as floating rate funds. There is a risk to these funds but they can be a rewarding alternative to traditional fixed-income investments.Bank loan funds are made up of loans made by banks or other financial institutions to companies. They are often below investment grade. They aren't really