Buyer Beware: Subprime Lending is not Dead

Refinance Now! Mortgage Rates near historic lows! Fixed Rate Mortgages available for as low as 5.8%! The above messages, complete with blinking lights and animation, intrude into my internet space daily. Following these links quickly led me to screens requesting personal information I do not care to divulge, so I was unable to cast an attorney’s jaundiced eye on the actual terms of these remarkable deals. I saw enough, however, to convince me that bottom-feeding internet mortgage brokers are aggressively courting people already caught in unaffordable adjustable-rate subprime mortgages, with the intent of luring them into even less affordable contracts to which additional broker fees have been attached.Refinancing is seldom a viable solution in cases where the homeowner cannot afford to repay the loan under the most favorable terms available in the open mortgage market. Here in Eugene, Oregon, financing a $230,000 median-priced home with a 30 year fixed rate mortgage at 6.8% interest would result in payments of $1499/month, plus roughly $300 monthly for taxes and insurance. A broker who promises a lower payment is relying on an adjustable rate mortgage, a balloon payment, or some other sleight of hand to conceal the true cost of the loan. In the end, the borrower has merely exchanged one neutron mortgage for another with a slightly longer fuse, and has paid a hefty commission in the bargain.

One site (mortgageloanplace) touted the advantages of FHA loans as a way out of the subprime trap. The Federal Housing Administration guarantees private bank loans to certain classes of borrowers, and, to the extent that unscrupulous brokers steered people who qualified for FHA loans into higher-cost alternatives, refinancing through FHA makes sense, provided that the person can make the payments on the lower-cost FHA loan. If he or she cannot, the FHA will foreclose, and the public will end up picking up the tab for any deficiency owed the lender when the foreclosed home is sold. Since part of that deficiency resulted from lender fees on the original subprime mortgage and the refinance transaction, the FHA subsidy here ends up being a subsidy to the lenders, not to the disadvantaged homeowner. For this reason, readers of this list who follow legislative developments and proposed fixes for the subprime mortgage crisis should be wary of proposals to expand FHA guarantees to subprime borrowers as a class.