I keep hearing about all foreclosures and homeowners feeling bamboozled. The media makes it sound like a huge crisis. But I don’t know anyone who’s been affected.
Anyone have a first-hand (or second-hand) experience they want to share?
My SO and I have been impacted, but in a good way. We’re buying one of those foreclosures (the previous owner bought about a 1 1/2 years ago and already lost the place). It’s working well for us because we’re getting a very nice deal on the place, to the tune of about $40K less than anything else nearby. We should find out today if our offer is being accepted, but we’re giving them full asking price so I don’t think there will be a problem.
Oddly enough one of the google ads is for countrywide, and they have helped several friends of mine get out of some serious potential issues. They are IIRC, the only mortgage lender who does not engage in preditory lending. And Preditory lending is what gets people into these monster McMansions at a 3% interest rate, but when that 3 year term is up their interest rate goes through the roof and they can no longer afford the payments.
I will just continue the slight hijack to say that I have had two mortgages with Countrywide and they were very professional, straightforward and ended up having the lowest rates that I could find at the time. They are great.
No, that’s caused by morons who are too stupid to write a proper budget, figure out what they can afford, and learn how adjustable-rate mortgages work.
It’s not as if lenders are looking forward to defaults. There’s rarely profit in a foreclosure.
Does “subprime” relate to the quality of the lender or the borrower? Or both?
The borrower. It’s a mortgage given to people the banks won’t touch with a 10-foot pole.
Generally the borrower, although some of the lenders who’ve been operating in that end of the market recently are probably also fair candidates for the term.
I strongly object to this characterization. Many first home buyers have the expectation that their real estate agent will give them the straight story on financing. Subprime mortgage holders in many cases had their real estate agents assure them that subprime was standard practice. With no background in business or financing, and with no trusted contacts, these people signed on in good faith, not realizing they were being taken to the cleaners.
These are usually normal working class people who have the expectation that if they work hard and are straightforward with everyone, they will be treated in kind. If everyone was like them, we’d all be better off - instead we have predatory lenders who have no qualms about setting these people up for a major fall. It isn’t a crime, but it’s damn close.
I wince when I think what kind of deal I might have agreed to if I hadn’t been lucky enough to have a good friend who is a loan officer - for Countrywide. She explained everything to me and made me understand the archaic world of real estate lending. Got me an amazing fixed rate and a terrific deal all the way around. Subprime customers are not idiots simply because they didn’t have the same friend as me.
No profit for who? The lending agent who closes the deal, takes his commission and retires early certainly sees a profit. So does the small lender who sells off the loan to a large institution while promising to still cover the risk themselves - only to default and declare bankruptcy when the situation becomes… well, now.
But there is profit in it for someone. All that change from the high interest rates goes somewhere, right?
Lenders don’t woo poor people with bad credit out of the goodness of their hearts.
One of the items we received at closing was a statement of our monthly payments — our EXACT monthly payments for the next 30 years.
Do people getting these ARMs not receive this document? Are they not reading it?
Not possible with an adjustable rate.
A friend of my father’s has a subprime mortgage. He took out a second mortgage against his home in order to purchase a vineyard. His business plan?
- Hire people to make wine.
- ???
- Zomg profit!
He had no experience in the wine-making industry and a couple of failed business ventures so you can see why the regular lenders were unwilling to finance him. He’s in all kinds of shit at the moment - he’s trying to sell the vineyard (for less than he paid) because he can’t sell the wine and the business is operating at a substantial loss. The interest on his debts is something like 200k a year, and that’s not including living expenses (including 10k+ a year private schooling for his two kids), or the operating costs of the vineyard.
His elderly parents are paying all his bills, and he’s borrowing money from his friends, but from what my mum has said it’s just delaying the inevitable. It would take a miracle for him to break even, and once his parents are unable (they were quite wealthy, but have long been retired) or unwilling to continue supporting him the most likely scenario is that he loses everything.
I feel incredibly sorry for his wife and kids but I have zero sympathy for him. He knew exactly how dodgy the loan was, and his overinflated opinion of his own entrepreneurial skills made him disregard all cautionary advice.
There are legitimate reasons for taking out a subprime mortgage. Sometimes people do it when they are buying a fixer-upper that they plan to renovate and re-sell quickly, that sort of thing.
I can only thank heaven that my in-laws did not get a subprime mortgage; they are just the sort of people who would fall for a predatory loaner, and they have made enough mistakes with the ordinary mortgage they do have.
Not exactly. You’re confusing subprime and predatory. The media and politicians do that all the time, except they do it on purpose.
Subprime is essentially a borrower that has enough hair in their credit report that the mortgage amount they want is not available. That can be someone who wants to buy a $150K house in suburban Detroit and has some delinquency or a guy with a decent job but wants to buy a $600K cape cod in Pasadena. In some cases people are getting sucked in by teaser rates and the fact that the lender will give 100% proceeds, require interest only and roll all the fees into the loan. They figure for two years they make the low payments and then will refi into more conventional product before the rate adjusts since property prices will keep going up. Of course at some point, prices stop going up. So now people are up against their adjustment and cannot refi the entire principal balance.
Your predatory situation is a bit different. One of the big scams is in the refi game. A family with minimal income owns a house in North Philly. They run up some credit cards and Joe Mortgage Banker calls up and says you can consolidate those cards into the home loan, take the tax deduction on the interest and you wind up ahead. Of course they get a nice high spread on the ARM, since they have weak credit, the mortgage banker tacks on a $4,000 credit counseling fee, a $2,500 origination fee, $750 in doc fees and rolls it into the principal balance. The Jones family is not very savvy financially and figures it will work out since its still slightly better than paying all of the credit cards every month. Six months later they have some more bills and Joe Mortgage Banker stops by and they cycle repeats itself.
The vast majority of sub-prime borrowers are not going to default and so the market allows those people to go ahead and buy a house. Some folks get in over their heads and they may lose their homes. Even so, lenders are more than willing to work with people since its cheaper to lose payments for a few months than go through the expense of a foreclosure. I have a friend who has been behind up to nine months on two separate occasions due to job losses. The lender went through the motions of foreclosure, but hung in there since my friend made good faith efforts to pay something when he had the money.
Predatory is more ominous. The guys who deal in this would have been used car salesmen or timeshare salesmen in another time. But this scam has been lucrative for them for some time. And there is usually no shortage of people who can be taken advantage of.
I bought a house several years ago. My FICO score was 790. I opted for a 5-year ARM at 5%, adjustable yearly after that.
Was I preyed upon?
Am I considered “subprime” just because I opted for an ARM?
I read the paperwork. I know what “adjustable” means. I know what the “worst-case” interest rate scenario is. I’d better, because the loan will convert at the end of the year. But I’m making more money now than I was 5 years ago, and we’re looking to buy a new house in a year or so anyway. I chose this loan for a purpose and it has worked out for me exactly like I figured.
I have no sympathy for people who would make such a large purchase without realizing what the words “adjustable” means. The papers run stories interviewing such people whining about how they “didn’t know what was going to happen.” These people are idiots.
I do have sympathy for people who made a reasonable choice but circumstances (medical, layoff, etc.) put them in a bad spot.
The stories in the paper also pointed out that many (predatory? subprime?) lenders don’t escrow for property tax and homeowner’s insurance and then people face foreclosure when they get a $6,000 tax bill they weren’t expecting. I’m not sure what to think about this. I think taxes should be escrowed (I opted out of escrowing my insurance, but still allow my taxes to be escrowed). On the other hand, how could someone not know what the property tax situation is. Sure, it’s different from location to location, but you can’t just ignore it and hope it never comes up.
Sorry for the ramble, it’s just that I get the same reaction as I did for those Reservists who were aghast (shocked! shocked! I tell you) when called up to active duty. (We didn’t know *that * was part of the deal! wah wah wah). Sorry, read your contract.
After we had owned our first house for about a year, I came home one day and my wife had this bad look on her face. She didn’t say anything much more a little while. Finally she handed me a quarterly property tax bill and ask me to look at it. She asked me what I thought we should do because we didn’t have the thousands to cover it. I took it, told her here is what we do, and ripped the whole thing up. She did not understand escrow accounts and automatic payments for those things. She didn’t understand the concept at least two other times it came up either. Some people truly don’t understand or maybe even can’t understand basic finance and banking concepts. I still say screw them all though. Everything was completely predictable the whole time for everyone involved.
I work for a brokerage firm. While I don’t own the stocks of any of these sub prime lending companies, I’ve spent a lot of time talking to people who do.
I don’t know if this qualifies, but I’m a reporter for a local paper in an area that has one of the highest foreclosure rates in the country. I hear the stories from people going through losing their homes. I’ve also spoken with organizations that are trying to help people avoid the situation altogether – free homeowner education programs offered by nonprofits, etc. The organization leaders I’ve spoken with say it’s an uphill battle trying to get people educated about the financial realities of home ownership before they buy. Buyers have stars in their eyes, and are unwilling (or unable) to ask the right questions of lenders.
As for personal impact, there are doubles across the street from me that will be auctioned off soon – the owner got in over his head with the mortgage and didn’t get the rents he wanted on them, plus had to spend some money on repairs. He doesn’t live in the neighborhood, so doesn’t give a rip – but I can tell you that the rougher kids have “discovered” the properties are empty and the windows can be jimmied open. I don’t live in the best neighborhood, but having empty properties sitting there ready to be vandalized isn’t good for anyone around here.
I don’t know if this is classified as predatory. However, our banks and financial institutions have decided, in their wisdom, to extend 30 year mortgages and no down payment terms recently.
I can see, in about five years, when interest rates go up substantially IMO, there’s going to be a lot of people losing their homes.
I can see people buying homes instead of paying rent but they’ve got to be financially educated and I think that’s a huge gap in our high schools.