The one thing we know about announcers on radio or T.V. is they certainly know how to talk, but do they know what they are talking about? Rarely, it seems! Take the sub-prime problem that reared its head last week on Wall Street. It seems everyone is talking about it and yet no one seems to know a thing about it. I dare say most who profess to tell you all they know about sub-prime, know nothing at all. Have I made that mistake, you bet! Last year I wrote a column on cars, acknowledging to not having the car gene and one of the readers pointed out that it was obvious because octane doesn't dictate gas mileage as I had implied. I really don't know, in fact I don't know if he is right, but I shouldn't have written it without knowing. I do not believe my wrong (?) information affected anyone but today's announcers are leading people to get the wrong idea about sub-prime loans and thus potentially hurting people who are in need of these types of loans.
Sub-prime lending is designed to help people with less than stellar credit get a mortgage loan. But this type of lending is also extended to those with good credit who might have a problem property, lack of reserves or maybe newly self employed. Prime lenders generally will not lend to someone who is self employed for less than two years, sub-prime will.
Sub-prime lenders offer the same types of loans as prime lenders but the terms can be different. First of all most sub-prime loans come with a prepayment penalty, in states where they are allowed, for two to three years. Most prime loans do not have these. Sub-prime loans generally have higher rates than prime loans but not always. Sub prime loans do not require mortgage insurance as the rates reflect the charge for mortgage insurance over 80% loan to value.
Cash out to a sub-prime lender means giving the borrower cash, not paying off debts that the borrower currently has on his credit report. Prime lenders consider cash out if you take more cash than you need to pay off your mortgage(s) and generally charge for the service.
Both types of lenders have a limit for the amount of cash you can have, but the sub-prime lender begins counting when you actually get cash, while the prime lender begins once the dollar amount surpasses the current mortgage(s).
While both types of lenders have stated income loans and automated underwriting I find that sub-prime requires much less documentation than prime. I once put out a sub-prime loan to a prime borrower for $3.2 million, with $1.8 million cash out, and the documentation was a W-2 from his Company to him, a 1099 from a Company he was associated with and a lease from his Company to him on a plant he owned and the Company leased. And the interesting part was that he only needed to show one year of the W-2 and the 1099 for his income validation. Sub-prime only uses one year of income documentation for loans with less than 80% loan to value. Prime loans generally require two years if documentation is used. (The aforementioned loan is now in the fourth year of a five year arm and is still at a lower rate than the borrower can get and is still performing perfectly.)
Sub-prime lenders for the most part do not offer option arms, the loans with negative amortization. Those "little time bombs" are the invention of the prime lenders and as you know, or now know, are my least favorite loan. Sub-prime lenders didn't invent interest only loans and for those who don't know, these are some of my favorite loans. Interest only loans give almost as many options as the option arm, but none of the detrimental ones and at much better rates.
My problem with the announcers is that they do not know any of the above facts nor do they care to know them. They allude to the fact that if the loan isn't a fixed rate it is sub-prime.
If it is an option arm or interest only it is sub-prime. I even heard one state that people were buying automobiles in the past by pulling cash out of their house and paying for them with the cash, but that won't be happening any more. Really! People always have difference of opinions but never before have so many spoke with so little knowledge.
A Wall Street analyst asked an investment banker if she was surprised that a major entity was buying $1.5 billion of sub-prime loans from a sub-prime lender and the investment banker answered: Sure, but at a price! I believe the investment banker was inferring that at a low enough price anyone would buy anything. But do you really believe someone would buy 1.5 billion of worthless loans, as sub-prime is currently deemed, at any price? It was an easy answer for the investment banker that people would readily accept and neither cared if it didn't hold an ounce of truth.
We are much too ready to accept the spoken word from someone who comes from a non-biased point of view, or even from a biased point of view if they are speaking with authority.
No one seems to want to question what they hear. Everyone, it seems that is in the media, is afraid to ask a follow up question for fear of alienating the person being asked, or alienating the audience for asking the question. Our information is coming from two ships passing in the night going in different directions. One gives a supposition, the other counters it and away they go never to interact with each other again.
Have we finally reached the point where everything that is said over the airwaves must be taken with a grain of salt. If so, I am afraid we are going to run out of salt.