Today’s Subprime Is NOT Like Yesterday’s Subprime!
100% FALSE STATEMENT ABOUT SUBPRIME
I received a copy of an internally circulated newsletter from a huge real estate firm with the following 100% incorrect statement about subprime lending:
“Subprime loans – the type that fueled the Financial Crisis – are making a comeback in a big way. The total volume of loans issued in the first quarter doubling from a year ago….”
The subprime loans that are coming back are nothing like the subprime loans that caused the financial crisis.
2004 HORROR STORY
In 2004, I was at a Star-Wars-Bar-Scene-mortgage-industry holiday party, with all kinds of miscreants who had oozed their way into the industry :).
Just in case the miscreants weren’t scary enough, there was a sub-prime rep who was bragging all night about his firm’s willingness to loan money to non-occupant investors with 100% financing, no income or asset verification, and a 680 credit score.
THAT was terrifying b/c those loans were guaranteed foreclosures waiting to happen (no skin in the game, and no occupancy requirement). I left the event very depressed b/c I knew the end was coming.
My point: Today’s Subprime Loans are not even close to those 2004 loans. Today’s subprime loans always require substantial income documentation, down payments, and/or assets.
The days of “stated income and stated assets” are gone forever b/c there will never be a market for those loans again. In 2004, Fannie, Freddie and all kinds of investment funds were buying those subprime loans for a variety of reasons, but that will never happen again.
Today’s subprime loans always require substantial down payments, ensuring buyers have skin in the game.
STORY #2: RELATIVE WHO LEFT ME HOLDING THE BAG
In 2006, I loaned money to a relative to cover her down payment and to pay off all of her consumer debt. I then co-signed for an excellent A-paper loan that I found for her. In 2010, she walked away from the property claiming she didn’t like her “predatory loan.” But, her total debt ratio was only 30%. The real reason she walked away was that she owed $75,000 more than her property was worth.
My Point: Most people walked away from their homes b/c they were upside down, and not b/c they couldn’t make payments.
B/c today’s subprime loans have such large down payment requirements, they are far less likely to end up in foreclosure than are many FHA and conforming loans with down payments of 3.5% or less.
STORY #3: BORROWER WITH $10 MILLION GETS SUBPRIME LOANS
I had a borrower years back with over $10 million in liquid assets, a multitude of business interests, and tax returns that were ten inches thick. As an interesting aside, he lived in a tiny ranch house in Concord, CA and drove an old car. In any case, he used to buy properties with 35% down and he always used what would be called “subprime” loans (stated income, but verified assets) today b/c he did not want to go through the hassle of trying to explain all his income. The loans I obtained (through Cal Fed/First Nationwide) were extremely competitive and they had virtually no defaults b/c of the credit, asset and down payment requirements.
My point: We desperately need “subprime loans” like those to come back to the market to serve well-heeled clients like the one above. We are over-regulated now, and those were great loans for borrowers and lenders alike.
NO DOG IN THE FIGHT
We have no dog in the subprime fight, as we have no ownership in any subprime lender and we don’t take advantage of subprime loans that often. My only concern is that misleading statements like the one at the top of this blog will prevent a very necessary part of the mortgage industry (a “healthy” subprime segment) from returning in force.
We need good subprime loans. Today’s subprime loans are nothing like yesterday’s. And, yesterday’s subprime loans will never return b/c there is and will be no market for them.
Jay Voorhees at (925) 855-4491
Real Estate Broker, CA Bureau of Real Estate, BRE# 01524255, NMLS# 335646