Maryland Mortgage Borrowers: Not Qualifying for Subprime Loans

Tougher standards have made subprime Maryland mortgage loans more difficult to qualify for - and that means they will have little affect on reducing the number of foreclosures in Frederick County.

Foreclosures totaled 809 in Frederick County for the 12-month period ending in May.

“It’s been years since I’ve seen those numbers,” said Michael Kurtianyk, director of residential sales for Tyler-Donegan Real Estate in Urbana. “The high numbers are a function of people buying homes above their means, and [mortgage lenders] giving money above their means. Now it’s time to pay the piper.”

Foreclosures in the county are at their highest level in 40 years, said Bill Poffenbarger, president and chief executive officer of Millennium Financial Group in Middletown.

“The government made it easy to buy houses because the rates were so low over the last six years,” Poffenbarger said. “People were scratching to get into a house.”

Subprime loan delinquency rates in the Maryland housing market rose from 4.6 percent in the first quarter of 2006 to 7.4 percent in the fourth quarter, according to a May 2007 report on Maryland by the Federal Reserve Bank of Richmond.

Subprime loans are often offered to people with a weak credit history who don’t qualify for commercial loans.

These bad credit home loans tend to be 0.1 to 0.6 percent higher than the prime rate. The seemingly small amount of increase translates to thousands of dollars of extra interest payments, according to Investopedia.

Borrowers who use subprime loans have a high debt to income ratio. Their mortgage history is shaky, there is high credit card debt or there may be a medical judgment against the borrowers, Poffenbarger said.

In a conventional loan, the applicant has to prove his or her creditworthiness. This includes W-2s, the last two years of a job history and tax returns, Poffenbarger said. But in a subprime loan, there is far less documentation,

“A subprime loan is the last avenue for a homeowner trying to get out of a binding situation,” said Brandy Mosser, director of secondary markets for Millennium.

Secondary markets represent mortgage companies and banks who buy Millennium’s loans as investments, Mosser said.

“If potential borrowers are on the road to foreclosure, they are already in an undesirable situation. Sometimes a subprime loan helps them for the time being, until they can fix their situation and get into a conventional loan,” Mosser said.

When borrowers must use subprime mortgage loans, Millennium works with them for solutions to their credit problems.

Stressed homeowners should make mortgage payments on time, while not taking on additional debt, Mosser said. The key factor during any mortgage application is when a lender seeks the applicant’s credit score, which ranges from 350, the lowest, to a perfect score of 850.

“A score of 650 to 700 is good, above 700 is excellent, and 850 is rare,” Kurtianyk said.

A score of 620 used to qualify a borrower for a subprime loan, but in the wake of foreclosures nationwide, the bottom score has shifted to 640.

Tightening credit is a typical reaction in the wake of foreclosures, said Marty Crabbs, an associate professor of business and accounting at Frederick Community College.

“When you have more subprime loans, you open up lending to borrowers who are a credit risk. There is a lower margin for paying back debt and a greater risk for foreclosure,” Crabbs said.

Lenders who make subprime loans a huge part of their portfolio will go out of business.

Freddie Mac, a stockholder-owned company chartered by Congress, recently announced higher underwriting standards for the subprime loans it buys. It doesn’t loan money to homeowners. The corporation buys loans from approved lenders, who take the funds and lend more money.

Kurtianyk, of Tyler-Donegan, said that because of the foreclosures, home buyers are being advised to take a few months, clean up their credit report, and come back when their buying power is stronger.

“You are not going to see subprime loans, and if real estate agents do, we will quite vehemently question and analyze the buying power of the loan applicant,” he said.

SOURCE: The Frederick News-Post