Bad Credit Home Loans: Handle With Care
To paraphrase the old adage, if it looks like a real estate bubble, smells like a real estate bubble and tastes like a real estate bubble, it must be a real estate bubble.
Right?
Experts now feel that the U.S. housing market is not in a bubble overall. But at least one part of the market certainly looks that way. The subprime (or bad credit mortgage) market for borrowers who can’t get standard loans sure seems like it’s about to burst.
On Wednesday, HSBC Holdings, one of the biggest subprime home loan lenders, said its bad debts exceeded $10.5 billion for 2006. On Thursday, shares of a number of mortgage lenders plunged further as worry about home mortgage defaults spread.
Last week, the Senate Banking Committee held a hearing on predatory lending practices among lenders, most involving bad credit mortgage loans.
On Friday, the Mortgage Bankers Association felt compelled to defend its members with a 13-point “fact sheet” arguing that subprime lending is “not a problem.”
Bad credit home loan lending rose from $150 billion in 2000 to $650 billion at the end of 2005, and now accounts for more than 20 percent of the mortgage market, the government says.
In theory, subprime loans can be good. In exchange for higher-than-usual mortgage rates, loans are offered to people who otherwise could not buy homes because of low incomes or lack of good credit.
But studies have shown that a mortgage broker or lender will often press subprime loans on borrowers who actually could qualify for conventional mortgages with lower interest rates. Why? Because the lenders pay the brokers bigger commissions on bad credit home loans.
To make matters worse, about 80 percent of subprime home loans carry with them mortgage rates that adjust every 12 months, starting after the loan has been held for two years. Many people who got these loans in 2005 are now seeing their monthly payments jump by 30-50 percent.
About 70 percent of bad credit home loans, unlike a conventional mortgage, carry prepayment penalties that can trap borrowers by charging thousands of dollars if they refinance within the first 3-5 years.
The non-profit Center for Responsible Lending estimates that 20 percent of subprime loans issued over the past two years will wind up in foreclosure, perhaps driving more than 2 million families from their homes.
What’s the solution? Some consumer advocates say a mortgage “suitability standard” to require mortgage brokers to put a borrower’s interests first when recommending a loan. Stock brokers work under such rules and can be banned from the business for violations.
Another remedy would be to require better disclosure of mortgage brokers’ commission, so that borrowers can tell if they’re being pushed toward a loan that’s more profitable for the broker than others.
Of course, borrowers need to do their part. If you are offered a subprime loan, ask lots of questions. Is there a penalty for mortgage prepayments? What’s the highest rate the loan could go to down the road? Are there other loans you can qualify for?
In the end, you may decide it’s better to continue renting rather than to make the move towards taking out a home loan that could bankrupt you.
What if you have a subprime loan and the payments are soaring? The fact that you’ve had a loan for a year or two may have improved your credit score. Call for a free credit report and find out.
Your chances of wriggling free of any prepayment penalty are not terribly good, but you might improve them by getting a credit counseling agency to call the mortgage lender. Fight hard. Be Smart.
SOURCE: Northern New Jersey Media Group