Subprime Crisis? What Subprime Crisis?

Implications: Thanks to the recent increase in subprime mortgage delinquencies and defaults, the media has finally divulged three of the lesser known US mortgage industry practices. 1) Credit scores are not (or should not be) the sole factor in categorizing borrowers as “prime” or subprime”. 2)Brokers are compensated almost twice as much for bringing lenders subprime vs. subprime loans. This provides more than enough reason to put a borrower in the “subprime” camp, regardless of the qualification process. 3) Despite the deluge of information regarding mortgage products and interest rates that is made available to all of us via television, radio and newspaper ads-not to mention the internet, homebuyers most frequently rely solely on their realtor to assist them in obtaining a mortgage..

Analysis:  

When FannieMae, one of the most vital contributors to the US mortgage industry, admits that up to 50% of subprime borrowers could qualify for prime loans, the message is clear: mortgage lenders need to re-examine their underwriting and broker compensation practices, before the regulators do it for them.

Since February of 2007, Capital Hill has been flooded with lender lobbyists, consumer advocates and politicians promising to help the subprime borrower. Despite the sins of the brokers and lenders, the most responsible party for this injustice is the borrower him or herself. A few additional phone calls can make the difference between a 6% loan and a 12% loan. The information necessary to find the most economical loan for all of we borrowers exists, we just need to open our eyes and read it.

I fervently believe that borrowers lacking the financial literacy to compare interest rates and loan terms should be entitled to some sort of guidance and protection. This exists in the form of RESPA and state and local consumer lending laws. Such laws require that lenders inform borrowers that they have a choice of lenders and that they may be able to obtain a lower rate. The laws also require that brokers disclose their compensation. It is difficult to believe such laws exist if 50% of subprime borrowers could qualify for mortgages with much lower rates. Politicians and regulators would be more effective if they ensured the enforcement of these laws instead of discussing modifications and bailouts.