Myths and Facts Regarding the Subprime Market
January 1, 2009
The current epidemic of subprime foreclosures is severe and widespread. The primary victims are hard-working families who, instead of gaining the benefits of homeownership, are struggling to keep their home. However, in spite of these realities, certain myths persist:
Myth: Adopting new laws and regulations to stop abusive lending practices will end up restricting credit and hurting the very people subprime loans are intended to help.
Fact: Bad lending practices, not good underwriting practices, restrict credit. The credit crunch is a consequence of the lack of adequate regulation and the reckless lending that followed. If subprime lenders had been subject to reasonable rules—the kind of rules that responsible mortgage lenders have always followed—we wouldn’t have the problems we’re seeing today. Sound laws bolster market health by restoring public confidence and promoting sustainable homeownership.
Myth: The subprime market is correcting itself, weeding out the bad players, and penalizing those who engage in unfair, deceptive practices.
Fact: Market forces are not correcting the situation. All the recent bailouts are perfect examples of the market's inability to correct itself, despite the clear warning signs.
Myth: Unemployment and other economic problems are the main reason borrowers are becoming delinquent and facing foreclosure in record numbers, not abusive loan terms.
Fact: Data shows that the severity of the current foreclosure problem is due to abusive loan terms, not simply economic forces. The 3rd Quarter National Delinquency Survey, recently released by the Mortgage Bankers Association (MBA), shows that foreclosures on all types of loans have increased, but, as expected, that the increase in foreclosures in the subprime market is most severe. The new data shows that 33% of all subprime loans were delinquent and that 1 out of every 33 borrower was undergoing foreclosure.
Myth: Clear disclosures on loan documents would have solved the problems in the subprime market.
Fact: It is a fallacy that borrowers consciously choose and accept the loan terms they get. Most terms on a standard mortgage contract are buried in pre-printed loan documents and are dictated by the lender, not negotiated by consumers. What’s more, by the time buyers see the disclosures; they likely have nowhere else to live but the new home.
As former Mortgage Bankers Association president, Rob Couch, explained, “Consumers rarely use these forms and disclosures to compare prices or identify the terms of the transaction because, quite simply, they cannot understand what they read nor what they sign. In addition, the mandated forms lack reliable cost figures, a fact that impedes prospective borrowers from ascertaining true total cost.” Brokers and lenders are already required to provide a mortgage borrower with a “good faith estimate” (GFE) of closing costs that supposedly must bear a reasonable resemblance to actual charges. Yet there no liability if the GFE is inaccurate or incomplete, or even not provided at all.
Myth: Most people facing foreclosure are investors or speculators who were trying to make a quick buck by “flipping” homes in a rising real estate market and have been caught in the downturn.
Fact: Most foreclosures—88 percent—are suffered by families living in their primary residence. While it’s always been true that the rate of foreclosures on investor-owned properties is higher than on primary residences, actual foreclosures are overwhelmingly dominated by families who live in their homes.
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