Tuesday, November 13, 2007

Sub Prime Mortgages for Sale!

[Times illustration: Rossie Newson]
So everyone knows about the subprime mortgage meltdown (as it's been called). I heard a show on NPR the other day, and a man called in from NACA, sort of just to plug his own organization. But he had a great idea. He said that they give prime loans to subprime applicants, and then they become prime applicants.
In other words, you have these subprime applicants. They have poor credit, and maybe not the highest incomes. Most lenders will charge them a premium to get at their money, in the form of subprime loans, given at higher interest rates, with tricks to make the true cost of the loan seem not that bad. These tricks include interest-only payments.
Whereas when you have a prime applicant with good credit and they get a normal loan at a favorable rate that doesn't require interest-only payments to seem reasonable. So the underqualified person is set up to fail by being lent money on really bad terms, while the qualified person gets their money cheaper. Makes sense from a risk perspective on behalf of the lenders, but not so much from a consumer perspective.
So this NACA believes that subprime borrowers still deserve prime loans. In fact, this guy on the radio (he was the CEO or something) said that they feel it is the only way to do it. So NACA gives the underqualified people good loans that they will have a chance to be able to pay, because it is reasonably priced money. That way, they are set up to succeed. They aren't given a free ride, but if they budgeted appropriately when they determined how much house they could afford, they should be all set.
In fact, now with these big mortgage companies losing all their assets to foreclosure, NACA even works with the big lenders and the in-over-their-heads borrowers to come up with something that the borrowers can work with. This basically means the borrowers decide how much they can afford each month, and the bank gives them an interest rate (and maybe longer term?) that makes it work for them. The lender is able to continue getting paid each month on the mortgage, and the borrower keeps their home. Sounds like a win-win doesn't it?
The biggest obstacle to a full roll out of this is the fact that most lenders don't hold their loans. They are infamously packaged into a variety of investment vehicles, which sort of removes any incentives to work with borrowers. We'll just have to see how it all pans out.

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