It's easy to point your finger. It's also much easier to point that finger when there's so much damning evidence. Non-prime mortgage loans issued to borrowers are being foreclosed upon at accelerated rates. Non-prime mortgage lenders are closing their doors as fast as they can because they can't afford to buy back the crappy loans they made.
What's a buy-back? There are two basic forms of buy-backs; default and fraud.
From a default perspective, there are two types; a first payment default and a general default where the owners go into foreclosure and the lender takes the house back.
A first payment default means that someone simply didn't make their first house. The time frame for a first payment default is about 60-90 days or so. Remember, when you go to a closing, you'll pony up for some prepaid interest which in effect is your first payment, but when it comes time to actually mail in the first mortgage check it never arrives. It was never mailed because the borrowers didn't make the payment.
Another reason for a buy-back is an agreement between the original lender and the current investor that if a note goes into foreclosure during a specified period of time or there was fraud discovered, the loan gets pulled and shipped back to the original lender. Non-prime or not.
Fraud can happen during the mortgage application, sometimes at the direction of the loan officer or the borrowers themselves, usually by lying about how much money they make and/or where their money is coming from to close the deal.
A loan officer doesn't get paid and a real estate agent doesn't make a commission unless a home sale closes. Or a loan officer doesn't get paid on a cash out refinance she's been working on so hard. It can be tempting to fudge numbers to make a big paycheck if people are so inclined. And according to loan fraud statistics, many are so inclined.
When a non prime mortgage lender makes a loan, that company makes a loan based upon previously agreed upon lending standards. When a non-prime lender makes loans that fit these guidelines, they too can be packaged up as mortgage-backed securities and sold to investors on Wall Street. Or whomever wants to buy them.
But if that lender sells a loan and it defaults and it's discovered that the loan in fact did not meet lending guidelines or there were inaccuracies in the loan file, the original non-prime lender is forced to buy back that loan. In cash. That can shut you down in a heartbeat. And that's what's happening now.
It's easy to wag your fingers at non prime lenders and tell them how terrible they are. But I disagree. Non prime lenders aren't bad because they make non prime loans. They become bad because they make loans outside established lending guidelines or allow loans to go through their pipeline that never should have made it to first base.
In their zeal to approve loans and offer more product, they put together mortgage loan programs so risky that by nature they spelled d-e-f-a-u-l-t. Just a few years ago, you'd never hear of a 100 percent mortgage loan for people with a 580 credit score. Wouldn't happen. For good reason, right?
A few years ago, you'd never hear of a Stated Income/Stated Asset Interest Only loan for someone with a recent bankruptcy. Too risky. But you see them both today.
At least for a while anyway. The non-prime industry has a record of shooting itself in the foot. In the late 90s non prime lenders were notorious at offering their mortgage brokers incredible yield spread premiums. I never saw it but I heard of 10 point premiums. That's $10,000 on a $100,000 note my friends. I did see premiums offered at 5, 6 and even 7 points.
Non-primers gave YSPs their bad name. What happened however is that non prime borrowers either refinanced out of those loans or otherwise retired them by defaulting or paying them off altogether. That means tons of non prime lenders paid some mortgage broker $10,000 on a $100,000 loan that didn't perform. And you can't make that up in volume. This practice was rampant.
Non prime lenders fell to their death. Doom and gloom was predicted for the industry and conventional lenders were wagging their fingers at them reminding them that they had no business making home loans.
Eventually non-primers recovered, sobered up a bit and got out of the stratospheric YSP game. Then went about their business of making good, solid loans that performed. They did that for such a long stretch that they made up nearly a quarter of all loans a couple of years ago.
Then they started making the same, aggressive mistakes. And now they're paying for it.
Non prime loans, by their nature, aren't bad. That is, they're not when they're issued under proven, established guidelines. But when their teen-aged behavior takes over coupled with a dose off loan officer or borrower fraud (with or without the lender knowing about it) things soon get out of control. And everyone pays.
Non prime lending won't die, but it will recover. It may take some time; probably a little dose of legislation here and there but it will recover. It's a good industry; they help people when they need help. But as they've proven in the past, for some reason non prime lenders shoot themselves in the foot. I hope they have more than two feet, that's all I can say.
