On the other hand several years ago I got a loan for a client for $3.2 million on a house appraised at over $6 million. The loan included $1.7 million cash out for the client to buy a construction yard for his company. This was a sub-prime loan because it was way out of the parameters of the major prime loan lenders. Both loans have performed perfectly.
To rehash an old column the sub-prime debacle included a number of firms who thought that they could defy common sense to make money they saw laying on the playing field and untouched by others. They went to stated wage earner loans, 100% financing, at low credit scores, in the 500 range and low and behold the borrowers couldn't make the payments.
Ray Charles could have seen that coming. Add in a couple of other crazy loans and you have the makings of a debacle. It is for the most part over. Many hedge funds are now buying up the remaining sub-prime lenders as they are very profitable and well run companies.
The problem that remains is in the prime field with several very large, household name lenders, up to their eye brows in option arm loans. As I said in the beginning of the article on an option arm you need to win two bets: rising housing prices and falling interest rates.
Currently they are losing on both. Real estate prices are flat to slightly lower and interest rates have risen over the last two years, although not extremely high. In the option arm loan most borrowers pay the teaser rate that leads to negative amortization (the increasing of the balance of the loan, not the decreasing as in standard loans.) Without an increase in the price of the house the equity starts shrinking and at some point the lender will no longer allow the teaser rate to be paid. The fully amortized payment is as much as two to three times more than the teaser rate. With shrinking equity it becomes harder to refinance and payments are missed. It was an accident waiting to happen.
The morale is to understand all facets of the loan you take, not just the good parts. It would be a hard loan to sell to borrowers if the borrowers were interested in finding out everything they should know about the loan. For the most part they just want the high lights.
Misunderstandings come from lack of understanding. Lack of understanding comes from failure to familiarize yourself with the facts. It's that simple! .