An Out for Subprime Borrowers?

John Berry says there may be hopeful news on the subprime crisis:

There May Be an Out for Some Subprime Borrowers, by John M. Berry, Bloomberg: The subprime mortgage market is largely a mystery to most of the public, and to many of the public officials trying to find ways to mitigate the damage done to borrowers caught up in it. ...

Helping owners already faced with the possibility of foreclosure requires knowing how the problems developed, which is why Eric S. Rosengren, president of the Boston Federal Reserve Bank, initiated a project to gather data on the subprime market in New England and what has happened to the people who used such mortgages. ...

What the Boston Fed researchers have found so far has convinced Rosengren that many of the troubled homeowners may qualify for a prime loan that could be profitable for community banks in the region if they are willing to go after the business. ...

[T]he researchers also found that almost two-thirds of borrowers in the county who got subprime mortgages had FICO credit scores above 620, which normally would have qualified them for a prime mortgage. ''And 18 percent had scores over 700,'' he said.

''They may have been in subprime products because they chose to make a highly leveraged home purchase, or they may have been steered to a more costly mortgage for which they might have otherwise qualified,'' Rosengren said. ''Either way, it is encouraging to note that these borrowers could be in a position to refinance to another product.''

Even though home prices are falling in parts of New England, as they are in many other areas, many subprime mortgage holders have been in their homes long enough that they may have enough equity to allow them to refinance into a prime loan. In some cases, simply having made their mortgage payments will also have improved their credit scores.

With the rates on subprime loans so much higher, ''if these borrowers could qualify for a prime product they would likely see a significant reduction in their interest rate,'' Rosengren said.

Part of the underlying problem is that banks and thrift institutions largely ceded the subprime market to the aggressive, unregulated brokers. The brokers sought potential clients wherever they could find them. Most of the financial institutions usually sat back and waited for buyers to seek them out.

Not that all of the subprime borrowers were blameless for their plight. It's quite clear that many were extracting equity as their homes appreciated.

Yet, of the subprime mortgages originated between 1999 and 2004, two-thirds were paid off within two years and almost 90 percent within three years, Rosengren said.

''While some of those sales may have been under difficult circumstances, it is plausible that many borrowers who purchased homes with subprime products did benefit from the appreciation of home prices ... over the last decade,'' he said.

The data from the Boston Fed shows the very mixed picture in the subprime market. Yes, foreclosures are up, though with timely action by borrowers and financial institutions, many owners potentially in difficulty should be able to hold on to their homes. ...[B]ankers and banking organizations ... should realize there may be an opportunity here to make a buck and do some good in the process.

Comments

[paine]

amazing with all the tut tut ing here
by some agin the prodigal borrowers

seems 2/3 were just too trusting
of the friendly broker

[paine]

"The researchers ... found that almost two-thirds of borrowers in the county
who got subprime mortgages
had FICO credit scores above 620
which normally would have qualified them for a prime mortgage....."

[spencer]

The question I have not seen answered is that for years and years the housing and mortgage markets did find without mortgage brokers. So why did they become necessary? What service are they providing?

I asked my 30-something daughter and she said she never though about going directly to the bank or having the real estate agent introducing her to a bank to get a mortgage.

Strange.

says...

30-something borrower here. Have a degree in Accounting.

What service are brokers supposed to serve?
They're supposed to help the borrower select the best product for the borrower.

Why do we need brokers?
Because now there are literally 30 times the number of loan products available today then there were to my parents 3 decades ago. When you're shown that many products, how are most people with or without experience in finance supposed to know what's best for them.

So what's the real problem here?
Brokers are acting as a fiduciary, without the rules and regulations of actually having a fiduciary duty to their clients.

Honestly there should only be a few products available to the great majority of people.

My 2c.

[spencer]

Interesting -- all day and does no one know what economic function mortgage brokers serve?

[spencer]

For some reason I did not see the comments above mine, sorry.

Still does not make any sense -- any banker can provide the same service or you can find the info on line.

Who pays them -- that is who they owe fiduciary duty to.

Why should you trust the broker to look out for your best interest?

It looks like a lot of people did when they shouldn't have.

[prostratedragon]

I think the reason that brokers have been able to insert themselves into the market started with the banking/thrift fiasco 20 years ago, which thinned out community lenders in a lot of markets, especially urban ones, at the same time that a) national mortgage lending was enabled by newer laws and regs and b) private securitization, and related "technology" like the use of conduits and warehouses, became standardized practices; for trailblazers here, think not only Fannie, Ginnie, and Freddie, but also Drexel et al.

(b) makes the new system possible, but (a) explains why, despite all kinds of anti-redlining efforts like CRA and the like, there were still lots of borrowers who really did not have access to a local community lender, and for whom therefore the brokers seemed to be performing a needed service. I think that group was a kind of testbed or nursery in which a profusion of "new products" could be generated, which later raised everyone else's search costs as well.

From what I can glean, the distribution of the mortgage process is a big and messy story all on its own, and an important one.

[piglet]

"[T]he researchers also found that almost two-thirds of borrowers in the county who got subprime mortgages had FICO credit scores above 620, which normally would have qualified them for a prime mortgage. ''And 18 percent had scores over 700,'' he said."

You forget that those credit scores are an esoteric scheme designed to get vulnerable people into debt, not an accurate reflection of their ability to repay. You forget that you can have a 720 credit score and still not earn near enough to afford that half million dollar house. You forget that those idiotic credit scores don't even take income into account! What really turns me off is that in the US, no matter your income, you can only get a mortgage loan if you have a credit card, preferably many, preferably since teen age! Not having any liabilities, in this system, isn't good but actually bad for your creditworthiness. Go figure.