After poking around the internet, I compiled some interesting statistics. Assuming the data is reasonably accurate, consider the following.
In 2005:
- 40 percent of all first time home buyers obtained 100 percent financing and put no money down;
- 25 percent of first time buyers closed on their homes with zero or negative equity;
- Sub-prime mortgage originations climbed to $625 billion in 2005, compared with $120 billion in 2001;
In 2006:
- Eight percent of sub-prime loans originated this year are delinquent by 60 days or more; almost double the 4.50 percent level of 2005;
What is a sub-prime mortgage? Simply put, it is a loan offered to folks who don't have the traditional credit history, down payment, or income levels that would normally be required to be approved for a typical conventional mortgage.
Needless to say, rates and fees on sub-prime loans are significantly higher.
It appears the sub-prime mortgage lenders are reaping what they have sowed. Let's take a look at some more data.
This is just a sampling of information I found searching the web.
While I've owned a small mortgage company for almost 15 years I have never focused on the sub-prime market, despite assurances from others in the business that this segment of the mortgage market was lucrative.
Lucrative as it may be, the plain fact is that the whole sub-prime concept never appealed to me. While it may be true that sub-prime mortgage lenders can provide the path of homeownership to folks who otherwise would be unable to realize the American Dream, the details of how the path was laid simply doesn't sit well with me.
First, let's take a look at a typical sub-prime borrower. These are folks that for whatever reasons, do not have a savings history, a credit history, or an income history that would qualify them for conventional mortgage financing. This is Strike One. Purchasing a home is a big commitment. Whether these folks are in their situation as a result of irresponsibility or economic factors beyond their control, it certainly bears merit to consider whether or not these folks are ready for such a commitment.
Second, the sub-prime market carries far higher fees and rates than conventional mortgage programs. This makes plenty of sense because a lender or investor will demand a higher return for riskier loans. But this is also Strike Two. Folks taking out a sub-prime mortgage are already at a financial disadvantage. Paying higher rates and fees exacerbates a difficult situation.
Here's Strike Three: Many, if not most, sub-prime loans carry hefty pre-payment penalties. This potentially locks the borrower into paying above market rates even if they have been able to clean up their financial picture.
I'm sure I will receive several protesting e-mails from sub-prime loan officers. And as I said, I'm sure there are many cases where a sub-prime loan is a good thing for a borrower. But it's pretty clear that there have been millions of sub-prime loans made to folks who found them unaffordable.
After looking at the headlines on the internet, it's also pretty clear that the sub-prime lenders are reaping what they sowed.
