A scary thought

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Do you know what type of loan you have? Do you have a 2 year adjustable with a 2 year prepayment penalty? If so, welcome to the club. The 2/28 (as it’s called in the industry) is the loan originator’s best friend. It’s like an annuity or renewable auto insurance policy – every 2 years you’re up again. Every two years (or sooner) someone is getting a nice commission check.

The scary thing is that there are many prime borrowers that ended up with subprime loans. Loans just like the 2/28 2-year prepayment flavor. I have talked to many people over the last few weeks with 700+ FICO scores with fully documented incomes who are in these 2/28 subprime loans.

Freddie Mac, a government-sponsored mortgage-loan buyer, estimated that
borrowers of 15 to 35 percent of all subprime loans it bought in 2005
could have qualified for prime-rate loans.

Fannie Mae, another
government-sponsored loan buyer, estimated up to 50 percent of the
borrowers, whose subprimes it bought that year, had credit profiles
that could have qualified them for prime rates.

Why are all of these prime people in subprime loans? Because subprime loans pay mortgage originators more money of course! There are so many stories out there of originators lying to people about their credit scores, of telling them that they only qualify for a 2 year program, the list goes on and on. I get sick just thinking about it.

Calculated Risk picked up a piece from CNN Money which talks about this phenomenon. Of course, the consumer is blamed for their plight. But I ask, how can a consumer make an informed decision when they are being lied to? How can they make an informed decision when the people they are talking to don’t tell them they qualify for a prime loan? How can they ask for a prime loan when the four banks that talk to them only offer them 2/28s?

In my opinion this is one of the biggest wrongs the industry could have perpetuated. Locking people with great credit in to terrible loans for the extra 50 bps in commission. Worse it was done by obscuring the more beneficial options – which is just plain wrong.

Check the story here and CR’s response. It can’t be the consumer’s fault when they aren’t told the full story.