Real Estate Info & FAQ

Subprime loans are a problem

First, subprime loans are loans that are NOT run through Fannie Mae and Freddie Mac. They are typically given to customers that have poor credit or other issues like income they cannot document.

The other problem with these loans, and I know this from working with these lenders in the past, is that they usually push Adjustable Rate Mortgages (ARM). The favorite is the 2/28, which means that for 2 years, the rate is fixed. After that, it can adjust. The real problem with this is when there is a 3-year pre-payment penalty on the back side. That means that for one year (month 25 to 36), you MUST pay the higher payment, but you cannot refinance without paying a huge penalty.

These loans serve a purpose. I have done them and then worked with the clients during the two years to fix their credit and get them into a conventional loan before the interest rises.

That is the main problem with them. You have lenders and brokers with a product and un-informed consumers. To many (not all) of the lenders and brokers, these are transactions, with the borrower left to fend for themselves.

Here is an article that points out these problems from a national economic level.

http://brokerwatchdog.com/2007/02/26/signs-of-a-subprime-mortgage-market-earthquake/

Labels: Buyers, General Real Estate News, Interest Rates, Subprime

posted by jkballentine @ 9:36 AM