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The housing crisis has sometimes been blamed on President Clinton, who, while in office, was urged by minority leaders to expand homeownership opportunities. In response, President Clinton urged lenders to offer more flexible loan programs, to help minority families, who would otherwise be left out of the dream, gain the opportunity to own homes.
The guidelines given by Fannie Mae and Freddie Mac were strict and required a 20% reduction; Money that most minority families did not have. The lack of a down payment has kept many minority families from realizing the dream of homeownership. As lenders began to relax their guidelines, subprime mortgages began to grow, by 500% in a few years.
Subprime lending offered alternative financing options that had more relaxed underwriting guidelines as it related to income and credit documentation. Until the birth of Subprime Lending, Fannie Mae and Freddie Mac were the founders who lent money to banks to help homeowners. However, their guidelines were strict and required a 20% down payment.
Subprime lending also offered alternative income verification, such as bank statements, and several publicized income programs for those who do not fall under traditional W-2 employee status. The programs offered by subprime lending were essential to giving Americans the opportunity to own a home. Small business owners can finally qualify for mortgages, and people who may have had some setbacks with their credit have a chance at homeownership.
Consumers flocked to buy homes when lenders offered little or no money, creating a frenzy of new, untrained loan officers entering the industry to take advantage of real estate demand. Loan officers were often not trained or trained to provide consumers with loan programs that were often higher than they were eligible for, with the addition of insignificant fees and unnecessary penalties for prepayment. Many of Subprime’s programs have been good for consumers. It was not high-risk lending; It was the misuse and overreaching of the underwriting guidelines that got us into trouble. To top it all off, consumers were put into exotic mortgages by lending officials and brokers who were given incentives by the lending institutions to do so.
A good example is the incentives that Countrywide and other banks offered to loan officers who charged consumers prepayment penalties on option loans and encouraged them to raise the consumer margin, a key component of the consumer interest rate. (Loans that adjust monthly and have a negative amortizing effect on the mortgage, option arm loans are subdivided into the Mortgage Types chapter.) The more margin loan adjusters the consumer has, the more money they get from the bank, the longer the prepayment penalty and the more they pay. The lender to the loan officer or broker
Loan officers were taking up to a 4% discount on the negative amortization of the home or option arm loans they sold to customers, that is, a $12,000 discount fee on a $300,000 loan, so they wouldn’t be mistaken for other upfront fees. Loan officers and wholesale account managers were given significant incentives to sell adjustable rate mortgages to consumers. The reason is simple – adjustable rate mortgages were more in demand by investors because they expected future profits when the consumer loan rate was adjusted.
Meaning that if you’re paying 7% on a two-year loan, investors were hoping they’d be able to make more money on your loan when you adjust it in two years. Little did many investors know that lenders set relaxed guidelines and that consumers could barely afford the payments they received at first, let alone increased mortgage payments that sometimes doubled. The investors didn’t realize that they might have been buying loans against real estate, but it wasn’t of much value because the consumers, who were responsible for the payments, couldn’t afford the mortgages. The guidelines got even more relaxed when President Bush encouraged lenders to take on the Homeownership Challenge in America to get 10 million more minority families into homes by 2010. President Bush took on the challenge in 2001. The reason he set up the challenge was to help save The suffering of the economy. While 75% of Caucasian families owned homes, only 48% of minority families owned homes.
To help increase activity in the real estate industry, minority families were the untapped market. For lenders, this has become the emerging market and special departments and programs have been created. Some of these subdivisions, such as BNC Mortgage, formerly an arm of WAMU, used tactics to secure minorities in homes that were less than ethical. The more flexible the programs become, the greater the demand from lower interest rates and higher property values. This prompted Americans to refinance and take over $2 trillion in equity, out of their homes in 3 years or less, during the height of the refinancing boom. Americans have fewer equity in their homes now than they did in the 1980s. The unfortunate part, is that many of the families who have refinanced their homes, have been put into odd type mortgages that, when modified or term expired, would make a consumer mortgage unaffordable. This tactic has also been used when consumers have purchased a home.
More than $9 billion in hard-earned equity was reported to be lost each year due to predatory lending practices prior to the subprime mortgage crisis. The few billions each year has now turned into a global financial crisis. Many families are victims today and still don’t realize that they are paying too much on their mortgage. White House statistics released showed that more than 50% of American families pay a higher interest rate on a mortgage than they qualify for, resulting in losing thousands of dollars each year in equity. HMDA statistics showed that the average African American and Hispanic household, with good credit scores, earned a 2-3% higher interest rate on their mortgage than a Caucasian buyer with the same credit.
The US Mortgage Disclosure Act (or HMDA, pronounced HUM-duh) was passed in 1975. It requires financial institutions to maintain and disclose data annually about home purchases, home purchase pre-approvals, home improvement, and refinance applications that include 1 to 4 residential and multi-family units. On a $300,000 loan, a family paying more than 2% would lose $700 a month and pay $300,000 in interest over 30 years.
The collapse of the mortgage industry shut down most mortgage lenders and guidelines tightened; Fewer borrowers will qualify, fewer refinances will occur and more short sales and foreclosures will occur, affecting the value of surrounding properties. Consumers have less money to spend, and all of this further dampens the flagging real estate market.
We’re back and now it’s going to be harder to get home ownership for the average homeowner, affecting those who were already victims.
Subprime lending expanded the opportunity for more families to become homeowners, and the abuse of predators is what caused the mortgage crisis.
