Who Has A Subprime Mortgage? People With Good Credit

The Wall Street Journal analyzed more than $2.5 trillion in subprime loans made since 2000 and found that as the number of subprime loans grew, the loans were being issued to borrowers with better and better credit scores—borrowers who could have qualified for traditional loans with more reasonable terms.

In fact, the WSJ says that at the peak of the subprime boom in 2005 over half of the subprime loans went to people with good credit.

By 2006, 61% of subprime loans were going to people with good or even excellent credit scores.

Why?

The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy — including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans — perhaps foolishly — with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.

The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals — and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms.

As we’ve previously learned, subprime mortgages were more profitable than traditional “conforming” loans and were easily repackaged and sold on the secondary market. Consequently, compensation structures were set up that encouraged mortgage brokers to bring in these types of loans.

So why did the borrowers fall for it?

Many borrowers figured they would refinance in a few years before the rate on their loan moved higher — but falling home prices and tighter credit standards in the past year have suddenly made that unrealistic in many cases. “Brokers and agents were telling” borrowers with high credit scores for the past several years “that it was OK” to get subprime loans, “and borrowers were wanting to take on more debt,” says Mark Carrington, director, analytical sales and support at First American LoanPerformance.

Subprime Debacle Traps Even Very Credit-Worthy [Wall Street Journal]
(Photo:Getty)

Comments

Edit Your Comment

  1. headon says:

    That’s right many were duped into a low teaser rate with the promise they could refinance.
    Then whoops sorry only kidding but thanks for letting me make a bunch of money off of your loan origination. Signed your Mortgage broker and bank loan officer.

  2. humphrmi says:

    I have a prime fixed conventional conforming mortgate on my house. For a short time, I had a prime fixed conventional equity loan on my house. A couple times I tried to refi the eq. loan to a lower rate, and every time my eq. loan lender (who wasn’t my primary mortgage holder) kept trying to push me into sub-prime, no-doc, cheap-and-quick loans (ARM of course) against my explicit instructions otherwise. Every time I cancelled the transaction. One time I asked if they even offered fixed rate equity loans anymore, and they actually told me “no”. I’m sure they were lying, just to get me into an ARM. This was LaSalle Bank. Yeah, they’re gone now too.

  3. Boberto says:

    Wow, another story that will bring us all to the big “duh” moment when we finally realize that the subprime mess is about unregulated mortgage brokers.

  4. ceejeemcbeegee is not here says:

    That pic is priceless.

    I’m not at all surprised. Seems even a “responsible” person with a good FICO score can make a bone-headed financial move.

  5. Me - now with more humidity says:

    We did it. We used the cashflow savings to start three businesses. We got crushed. If you hate us, f%$k you.

  6. chili_dog says:

    ARM loans, just like interest only and others are great products, if you use them correctly.

    Sorry folks, but taking a 105% loan that maxed out your finances was just bad money planning.

    Want to fix the problem, freeze the interest rate at the initial term and all will be well.

  7. goodkitty says:

    @boberto: But lets face it, it’s not like any of these lenders would have suddenly been full of sugar and niceness just because they had an official ‘lender license’ on the wall. What’s sad is how desperate everyone is getting, trying to scrape every nickel from the face of the planet. We don’t need predatory lending laws or regulation, we need some kind of personal responsibility on behalf of everyone. If we regulate lenders, then we have to tackle credit cards, then big pharma, then repair shops and car dealers, then cellphone companies, cablecos…. ad nauseum. When does it end?

  8. Catperson says:

    Is a no down-payment loan like an 80/20 considered sub-prime? That’s what I had when I owned a home, and we did it because there’s no way we were going to be able to save up 20% of $125,000 to buy a house. The 80 was a fixed rate and the 20 was variable. This was a few years ago and everything everywhere was touting the benefits of the 80/20 loan. Everyone recommended against the FHA loans for buyers without down payments, but I heartily recommend not getting an 80/20 loan. That variable rate skyrocketed, and while we were able to pay it, it certainly cut into our budget. We ended up selling the house to move away to go to grad school, and we decided to not own a home while in school. Anyway, this is just to say that we had excellent credit, but no down payment, and it seems like everyone we knew who was buying a home at the time was in the same boat. So that might explain this a little.

  9. catcherintheeye says:

    @chili_dog: Agreed – if you are a low-income individual who is purchasing a house and is expecting to see a significant increase in salary (perhaps a current med or law student) an ARM can make a lot of sense.

    Of course, the majority of people are not in this scenario, and the simple mathematics of it doesn’t make sense for anyone else.

  10. Omi says:

    @catcherintheeye: If you are a low-income individual who is expecting to see a significant increase in salary – keep your pants on, at least until the ink on that first fatter paycheck dries and gets handed to you. Because more often than not you don’t end up actually getting that salary increase you were anticipating, and then you’re screwed! :D

  11. ceejeemcbeegee is not here says:

    @Catperson: Imagine trying to save 20% of a $500K home… the median price here in LA. Who really saves $100K 2 years out of college?

  12. rjmatm says:

    @Me: I don’t think anyone hates you. At least I don’t. The real problem is that people have gotten into the ARM’s and now some, not saying you, are asking for pity. Some even expecting the government to bail them out.

    People are getting angry as they see the economy in a downward spiral. Which seems to have been kicked off by people thinking they could manipulate the housing market which could turn on them at any time. Guess what? It turned on them and now some of them want a ‘do over’ which just elevates the anger of some who refused those easy to get ARM’s. You want to gamble? Fine, then you have to be willing to lose.

  13. gingerCE says:

    Do I have a subprime loan? I have 1 mortgage (had down payment), have 5 year low interest before it starts to rise.

    I know I have an ARM but is that the same as a subprime loan?

  14. Catperson says:

    @ceejeemcbeegee: Oh, I know! No one I know has $25k saved up for a down payment here (I’m in OH), so I know everyone in those crazy markets must have gotten some kind of nontraditional loan to be able to buy a house.

  15. iamme99 says:

    There are a lot of possible reasons for people with good credit taking on an arm mortgage. Some make sense, most don’t.

    As CATPERSON mentions, many people don’t have any savings, so can’t ante up the necessary down payment for a home. Others had savings but were convinced that the lower monthly payments of an ARM would allow them more discretionary $$ to spend or they could make more by deploying their savings elsewhere ,like into a second or third house for rental. Still others wanted as much cash flow as possible to fund a business as ME above mentions.

    However, the likely one thing in common with all these scenario’s was the belief that they would either A) be making more money when the loan reset and could afford the higher payments, B) believed that the housing market would continue to appreciate for the next 5 years or so at the rate it had been doing, allowing them to sell at a profit when the bell tolled or C) believed that fixed rates would be lower in the future and they could convert then. Probably a few other possibilities also.

    But they all rolled the dice and took on risk foolishly. Further, I’d wager that few even considered that housing prices could stagnate, let alone fall. Now many are up the river without the proverbial paddle. I have no sympathy for them. Many thought they were sophisticated players and knew what they were doing. NOT.

    Also, there’s a slew of interesting comments on mortgage bailouts over here:
    [www.marketwatch.com]

  16. mikala says:

    I distinctly remember my mortgage broker telling me “with your credit score you can borrow as much as you want.” I realized it was up to me, and me alone, to make a wise decision. If those fools were willing to give me a million bucks because I paid my bills on time for 10 years than something was wrong.

    I also distinctly remember my Realtor basically telling me I was dumb to do a 30 year fixed. Now that people with the 2% 3 year ARMs are being bailed out, maybe he was right.

  17. JustRunTheDamnBallBillick. says:

    Its not bait and switch. I did a lot of those ARMS into Fixed loans as a broker. It was a great deal for someone who needed a credit fix or to buy without a dp. With appreciations in this area at 15% or more someone could buy a 100% arm and three years later refi at 70% or less on a low rate fixed. The problem is all of the sudden a couple lenders tightened up and a few people couldnt refi, this led to forclosures and short sales, which lowered prices, which made it harder for people to refi, which forced lower prices, which made it even harder for people to refi ect…

  18. BigNutty says:

    Using the savings to start a business “ME ABOVE” seems to be the only reason that makes sense.

  19. Buckus says:

    I “foolishly” got a 30 year fixed because I’m not stupid enough to think that rates will continue to go down or stay the same. That is to say, I’m not clairvoyant. However, with the 30 year fixed, I can see what my interest rate is going to be 15, 20, 25, and 30 years out. Although I will most likely be making more by then, the 30 year fixed was the safest choice on the biggest purchase of my life. And I didn’t have a down payment, either.

  20. Major-General says:

    @gingerCE: Sounds like a 5 year ARM. As to whether its a subprime loan, is your current interest under the Federal Reserve rate of 5%? If so, then I would say it is.

    And because we worry about liability, I am not a banking or real estate professional. I’m a guy using logic and common sense.

  21. Rusted says:

    This story means that a lot of subprime borrowers can still refinance and stay away from financial disaster. The glass half full here. This is actually good news.

    @MeI’ll only be irritated if Uncle Sammy shows up and says I have to help. I can see using the house to start a business. But three of them? Could you expand, please?

    @boberto: I was listening to a panel on that and one of them did bring unregulated mortgage brokers up. Also, think of the fools who bought that paper too.

    @JustRunTheDamnBallBillick.:Don’t forget the market being way overvalued and correcting itself.

  22. aka Cat says:

    @Catperson: I shopped at a couple of different brokers, and they both tried to talk me into a 100% ARM or an 80 fixed / 20 ARM like you got. My builder’s lender was the only one willing to set me up with an 80/20 fixed.

    It turns out I was able to pay off the 20 in three years, but if I hadn’t I’ll bet I would have felt pretty sub-prime.

  23. Me - now with more humidity says:

    RJMATM: It’s touchy subject around here 8-) because we get lumped in with the people who bought toys and now want a bail out. We gambled, we lost, we’re dealing with it.

  24. Anitra says:

    @buckus: Same here. We got 80/15 loan(s) because we could only afford to put 5% down. But the primary mortgage is 30-year fixed, and the secondary is 15-year fixed. We shopped around to a few different mortgage brokers, and most of them tried to tell us we could afford more house, or that we’d be better off with an ARM. We weren’t stupid enough to take them up on it.

  25. Dagamon says:

    A lot of people are saying how “stupid” folks are for buying into this scheme, but the article states that a majority were getting loans like this. If you were a first-time home buyer with little cash trying to buy into a red-hot buyers market where houses were going for 20% over asking price, it looked like the only way to get into a house.

    Then right after the ink is dry on the settlement, the bottom falls out and you are stuck with a bad loan that you can’t afford and that you can’t refinance.

  26. humphrmi says:

    @Dagamon: I think that the “stupid” part isn’t first time home buyers with little cash trying to buy into a red-hot sellers market where houses were going for 20% over asking price. I think that the “stupid” part is those buyers not waiting, staying in their apartments, saving up more money, and then buying when they could afford it.

    I think you’ll find that that is exactly what all the “smart” people (i.e. the ones who aren’t in this mess now) did.

  27. Dagamon says:

    ‘Sellers’ market, that’s what I meant.

  28. BlondeGrlz says:

    @Catperson: We got an 80/20, but both had fixed rates. The 20% rate was higher, but we paid down two points ($2000) to lower to almost the same as our 80%. It is not at all considered a “subprime” way to finance your home. My mortgage broker mentioned ARMs and interest-only loans, but when I threatened to just leave and go to my Credit Union he shut up. To be honest, I still went to the CU and their deals weren’t as good. The advantage of the 80/20 is you don’t need a down payment (@ceejeemcbeegee: I can’t imagine saving 20% of $500k!) and you don’t need Private Mortgage Insurance. The disadvantage is you need good or excellent credit to get a low rate.

  29. pinkbunnyslippers says:

    @Catperson: The 80/20 “option” is just a way to circumvent Mortgage Insurance. I wouldn’t consider it “subprime” — that really depends on the type of mortgage product and rate you got.

    Nowadays it’s becoming more and more difficult to find someone to give out those 80/20 loans. We’re seeing a big resurgence in Private MI.

    I have an 80/20 5-yr ARM. It’s the only way a single person like me could afford a place in the DC market. Just use it wisely, and you’ll be fine. ARMs aren’t bad products – but they can be used improperly…

  30. TechnoDestructo says:

    @JustRunTheDamnBallBillick.:

    “The problem is all of the sudden a couple lenders tightened up and a few people couldnt refi, this led to forclosures and short sales, which lowered prices, which made it harder for people to refi, which forced lower prices, which made it even harder for people to refi ect…”

    Translation: “The problem is all of a sudden we ran out of bigger suckers.”

  31. Kevin Cotter says:

    I used to write mortgages as a loan officer; People wanted 5/1 arms because they moved and refinanced often. Some people knew they’d upgrade within 5 years others thought they’d move out of town. The unsustainable housing market had everyone out there looking for a quick easy buck. They got trapped when the prices stopped rising and the homes wouldn’t move. Now the government is going to bail out speculators who happen to live in their investment.

    The subprime loans shouldn’t even be in the same class as ARMs. Subprime loans were out there for people who had BAD credit and didn’t pay obligations. Those had teaser rates of say 10% or more for a typical 3 years. This gave the borrower three years to clean up their credit and refinance into a prime loan. It was a fresh start for many.

    No and low-doc loans were written mostly for people hiding income from the government for tax purposes. A gal in our office wrote dozens of large no-doc loans for strippers who qualified for food stamps based on income claimed yet they made more money that many loan company executives. Other people who asked for these loans – nail techs, gamblers, tipped employees, etc. You paid taxes so they wouldn’t have to, now you can buy their home.

    There were too many loan officers out there in the heyday trying to make a quick buck on the more exotic loans. Every bubble had those same charlatans, whether it was stocks, gold, or real estate. Some of the blanket regulations that are going to come from this mess are going to drive the costs of loans up. Percentage wise, it’ll hurt the lower income people the most. Either way the charlatans are already gone in search of the next bubble to make a quick buck off.

    Any loan that adjusts has a plethora of extra documents so you know it adjusts. There is no excuse so people saying they didn’t know. People are complaining about their loan officers not offering the loan they wanted – how many of them shopped around? People shop around for cars, computers, and plasma TV’s, but they just take a mortgage. I had people have all of their paperwork reviewed by their lawyer – I encouraged it.

    I read all about people not being able to save 20% – folks, FHA requires 3% down, VA nothing, and Fannie Mae had programs with 3% down. It was all about the consumer trying to get out of paying mortgage insurance, which rises and falls inversely with the amount you put down. Mortgage insurance isn’t tax deductable like interest.

    A few lenders even had zero down loans with traditional rates and amortizations – but they were red-lined to poor areas, areas with high minority rates, and poor people period per ACORN. Yeah ACORN, the people that were supposed to be protecting those people forced many into zero equity loans. ACORN also wanted a cut on each loan, driving up the costs to consumers.

    I have an 80/20 interest only on my home, because we didn’t save properly, and I wanted to avoid mortgage insurance. I make interest payments each month – mostly on the secondary loan. I will have to refinance in another 2 1/2 years. By then this mess will be over. I’ll problably do a 15 year note and try to finish it early.

  32. anatak says:

    A large part of the problem is people taking their financial advice from people who stand to benefit from the buyer paying more – namely the agent and the loan officer. Financial advice from those two parties are unwelcome as far as I’m concerned. Well-intentioned or not, they need to shut their mouth and do their job, and that does not include steering me into something stupid because they heard on the radio one day that it was a good idea.

    Another big reason is this kind of attitude:
    @Catperson: “there’s no way we were going to be able to save up 20% of $125,000 to buy a house”.
    A reputable person in the home loan industry once told me, many many years ago, that if you can’t put 10% down, then you aren’t ready to own a house. There’s no way!? None? I was shocked at how quickly we saved up our down payment. But there was no way we were going to pay PMI. We also have no interest in being in debt any long than need be. I guess its all about where your priorities fall.

  33. Crymson_77 says:

    @Catperson: I have an FHA loan, and still had no downpayment. That little window has since been closed though. At one point, while shopping for a house, a LENNAR (home builder) salesperson advised us that this activity was illegal. Obviously not, and thank god for my being somewhat informed, as we did exactly that and got an FHA loan out of it. If you can get an FHA or VA loan, do it! We were doubly lucky as Wells Fargo is the lender/owner of our note and they never sell FHA loans that stay in good standing to anyone.

  34. RagingBoehner says:

    @Major-General: How would having a low interest rate make it a subprime loan?

    Subprime doesn’t mean “below the prime interest rate” it means “worse than prime credit.”

  35. Beerad says:

    @ceejeemcbeegee: But that’s part of the problem — why should anyone reasonably expect to own a home two years out of college, especially in a real estate market like LA?

  36. quail says:

    An ARM isn’t always a bad thing when done by a reputable lender and you’re aware of the risk. Neither I think were true with home buyers from the turn of the century on. My wife and I had a good experience with the ARM we had with our first house. We fixed the rate 2 years in just to be safe and only lost out on 1/2 a point. Well worth the peace of mind.

  37. Egakino says:

    All through out this housing bubble I thought to my self well, easy to get loans on overpriced houses, hmmmmmm maybe renting is not that bad right now. Figured it was gonna have to break down sooner or later. In fact everyone was saying that it was an unbelievable market and that it was amazing that it was still going on. When you think about it the tech bubble was the EXACT same way. Everyone thought it was unbelievable and that it couldn’t go on much longer, basically crossing their fingers everyday.

    Point being everyone in the finacial sector KNEW this was going to happen eventually, hell I knew this was going to happen. Most people can put 2 + 2 together.

    That being said this is the fault of the financial sector and the lenders not the borrowers. As we have all read on these forums many times these lenders outright LIED to people to get the loans made, not mislead, not hid things, not even piled it in 300 pgs of paper work so you would just skip it all, they flat out lied on 90% of these loans. Not many people are stupid enough to get into these loans, poor or middle class.

    A lynching is in order.

  38. JayDeEm says:

    @humphrmi: Having been a renter in Southern California, I’m afraid I have to disagree somewhat. Rent increases always managed to keep pace with rising home prices in the area, cutting right into that down payment. After 2 years of rent increases, the community converted to condos and we had to find a new place to live. Moving also costs money.

    We eventually gave up on the money-pit that is California and bought in a different state. While we did get into an ARM, we are still 3 years from an adjustment. When that eventually does happen, it can’t move more than 1% per year and is capped at 11%. Not great, but could be a lot worse. My mortgage is about the same as my rent was in California, only now I get to write it off.

  39. barty says:

    @Egakino: That’s right, its the fault of the businesses that too many people bought more house than they could reasonably afford.

    Truth in Lending requires lenders to list all their fees and interest rates on a single page, in plain English. People knew (or should have known, if they read the contract to begin with) what they were getting into when they signed the paperwork. Like so many people do with cars in this country, they did their home-shopping based on payment and not bottom line price. So people went off and bought $500k or more homes on 4% rates that were only good for 3 years and even when the rate went up a single percent, their payment jumped $500-600 a month and all of a sudden they’re maxed out because they’re making a $600 a month payment on a SUV or Lexus they can’t afford and are paying another $1500 a month in credit card bills to pay for the gas on their SUV because gas prices have been so high lately. So, is it really the lender’s fault because these people knowingly over-extended themselves? No! Was it a stupid business decision to write all these loans. Certainly. But hopefully the honest businesses that survive will take it as a lesson to look more than a quarter ahead and realize that maybe the profit they’re making isn’t worth the risk they incur when the Fed stops giving money away for nothing.

  40. marsneedsrabbits says:

    We have friends with a sub-prime interest-only-for-the-first-ten-years loan on a large home in an expensive north-eastern market.
    The husband takes a huge number of deductions on his W-2 so that they can have money to live on, as their mortgage (even with no principle being paid), is thousands a month.
    We have a slightly smaller home with a low-interest traditional mortgage in a much less expensive market.
    Of course, we get to keep our home, and when they lose theirs, they’ll still owe tens of thousands due to the recent drop in value.
    I’m very sorry that people like our friends are losing their homes or end up owning twice what they could possibly sell it for, but not enough to bail them out.

  41. Catperson says:

    @anatak: I agree with you re: not being able to afford a home if you can’t save up 10% after having a home without the down payment. We were never in danger of being foreclosed, but things were tight. If one of us had lost our job or had a similar emergency, we would have been screwed. We’re definitely going to do it the right way the next time we buy. Also, when I say “no way” we could have saved up a down payment, I mean no way in the amount of time we wanted to wait to buy a house. We were sick of living in apartments and knew we would be going back to school soon, and wanted to buy a house in order to have it enough time to make money on it (we bought a fixer-upper). I’m not saying any of this was wise. We certainly learned a lesson because we didn’t end up making money on the house – we just about came out even.

  42. ceejeemcbeegee is not here says:

    @Beerad: Oh, but I hear it all the time… You’ve got to own a home.. it’s the American dream! You still rent? But you make good money? it’s infuriating.