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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.
Morgan,
While your intentions with the blog are good, you aren’t helping anyone with misinformation like this.
You state that “subprime loans pay mortgage originators more money of course!” This is patently untrue and indicates a lack of understanding of secondary markets. A loan in and of itself does not pay more than any other. Every loan has a “par” rate which requires no cost and pays no premium. A prime loan has a lower par rate than a subprime loan. So if we compare note rate to note rate, the prime loan will pay more. An experienced originator who can package a loan to be approved on a prime program but sell the subprime rate would make far more money by doing so than they would by placing the qualified borrower in a subprime loan.
Which now begs the question, “If they don’t do it for money, then why do LO’s put prime borrowers in subprime loans?” And the answer is lack of knowledge and experience. The subprime programs allow you to put together a POS file and still get an approval. If POS files are all you can create, you send them to subprime lenders that are happy to oblige your ignorance.
Does this make it OK. Absolutely not. Screwing a borrower isn’t any better if you do it out of ignorance instead of greed.
Which leads to your next gross overstatement, “How can they ask for a prime loan when the four banks that talk to them only offer them 2/28s?” The question is a straw man. You set up an argument that you can’t lose with a false premise. The unstated premise being that 4 out of 4 lenders would quote subprime terms to prime borrowers, thus duping them into believing that a subprime loan is the only one they qualify for. Let’s be aggressive and say that 50% of originators only know how to do subprime loans so that is all they quote. If a borrower were wise enough to call 4 lenders when they are getting misled they would only have a 6% chance of having all 4 quote them subprime terms. Get more realistic and say that 25% quote only subprime terms and the number drops to .4%. This doesn’t happen in the real world and you are doing your readers a disservice to imply that it does.
Try to remember that you live in a world where DiTech, Greenlight, Countrywide, etc. run an ad during nearly every commercial break stating their current low fixed rates. If you don’t watch TV, that’s OK they plaster it on billboards, blast it over the radio waves, mail it to your house and put it in the newspapers.
If you have a 700 credit score and sign docs on a subprime loan, you need to accept the majority of the blame. Yes, you were taken advantage of but you live in an economy where better options are crammed down your throat and you still accepted an inferior option.
Please stop pandering to the woe is me, we’ve all been abused by the mortgage industry crowd. There is enough justified outrage that we don’t need gross exaggerations and mischaracterizations clouding the issues.
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