Here’s the dilemma.
People often do things they shouldn’t. They eat fatty foods (hi Terry!). They smoke and drink alcohol (and shoot smack). They watch American Idol instead of playing with their kids or instead of learning more about Iraq.
They also tend to borrow more money than they should. Credit card debt puts many college kids into a hole they can’t ever get out of, by the time they graduate.
And, of course, many borrowers take out home mortgage loans they shouldn’t have.
Who is to blame for the rise in subprime lending over the past several years? The mortgage lenders? Maybe? The borrowers? Perhaps.
Today, federal regulators released a “statement on subprime mortgage lending”.
What does it say?
The statement “recommends that subprime hybrid ARMs be underwritten at their fully indexed rate.
For example, a borrower with bad credit might get what’s called a 2/28 loan. That’s a mortgage with an initial rate that lasts two years, and the rate changes annually after that.
Right now, that borrower might start out at 8.5 percent for the first two years. After that, it might have a top possible rate of 14.5 percent.
The feds are telling lenders to give a loan to that borrower only if he or she can afford a payment at that 14.5 percent rate. For a $200,000 loan amortized over 30 years, the monthly principal and interest at 8.5 percent would be $1,538. At 14.5 percent, monthly principal and interest would be $2,449.”
Gee, that seems pretty logical, doesn’t it? You should have to qualify for the bigger amount, right? And/or, some sort of blended rate, right?
Yet, that’s not what happened in the past. The lenders weren’t required to qualify its borrowers, and borrowers were happy to get as much money as they could put their hands on.
The day of reckoning could be at hand. Unfortunately, not only the lenders and borrowers are at risk, here. So is the US economy.
Fed Weighs In – By Holden Lewis, Mortgage Matters, Bankrate.com
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Updated: 1st Quarter 2018
