- The Washington Times - Wednesday, March 21, 2007

Most of you probably have heard about the subprime mortgage meltdown.

For folks who are unfamiliar, subprime mortgage loans are offered to folks who don’t have the traditional credit history, down payment or income levels that normally would be required for approval for a typical conventional mortgage.

These loans obviously carry higher rates and fees because the borrowers are deemed higher credit risks.

The rise in subprime lending over the past few years has been startling.

Consider:

• In 2005, 40 percent of all first-time home buyers obtained 100 percent financing and put no money down.

• Twenty-five percent of first-time buyers closed on their homes with zero or negative equity.

• Subprime mortgage originations climbed to $625 billion in 2005, compared with $120 billion in 2001.

• Eight percent of subprime loans originated in 2006 are delinquent by 60 days or more, almost double the 4.5 percent level of 2005.

The major players in the subprime market are dropping like flies. Although most analysts don’t forecast the crisis as severe, it nonetheless has had a significant impact in the U.S. financial markets.

I have one simple question for the subprime lenders: What on Earth did you expect? I’ve owned a small mortgage company for almost 15 years, but I never focused on the subprime market despite assurances from others in the business that the subprime market was lucrative.

Lucrative as it may be, the plain fact is that the whole subprime concept never appealed to me. Although it may be true that subprime mortgage lenders can provide the path to homeownership for folks who otherwise would be unable to realize the American dream, the details of how the path was laid simply do not sit well with me.

First, let’s take a look at subprime borrowers. These are folks who, for whatever reason, do not have a savings history, a credit history or an income history that would qualify them for conventional financing.

That is strike one. Purchasing a home is a big commitment. Whether these folks are in their situation as a result of irresponsibility or economic factors beyond their control, it certainly bears merit to consider whether they are ready for such a commitment.

Second, the subprime market carries far higher fees and rates than conventional mortgage programs. This makes sense because a lender or investor demands a higher return for riskier loans — but this is also strike two. Folks taking out a subprime mortgage already are at a disadvantage. Paying higher rates and fees exacerbates a difficult situation.

Here’s strike three: Many, if not most, subprime loans carry hefty prepayment penalties. This potentially locks borrowers into paying above-market rates even if they clean up their finances.

It’s plain common sense. Lenders that made high rate and fee loans to folks who had bad credit histories are not likely to be repaid. The result? The meltdown of the subprime mortgage market. It’s not rocket science. Anyone should have predicted this.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).

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