The Mortgage Porter

The other day, FOX news contacted me after reading one of my post wanting to interview some of my successful borrowers who once had a subprime mortgage.  You wouldn’t know this from watching the news: a majority of subprime mortgages are performing well.   It’s a minority that are not.   

I was eager to help tell this story and sent an email out to a handful of my clients who once had subprime mortgages letting them know about this opportunity.   No one responded.   It made me wonder if they are embarrassed they once used "subprime financing"?   With how it’s getting a big black eye, I guess I could understand how they feel.    It’s too bad that more of the "good news" about this type of financing is not making the headlines.

The fact is, most of my clients who had subprime/alt-a mortgages are doing very well.   They did what you’re suppose to do if you have a subprime mortgage:

1. Work on improving what ever situation caused them not to have a "prime" mortgage (employment, credit, assets, etc.).
2. Prepared themselves for when their fixed period and prepayment penalty is over so they can refinance into a "prime" mortgage.  They had an "exit strategy".

Here are a few examples:

Single mom who’s self employed for one year but coming from the same line of work for five years with excellent credit.   She had a track record of solid income however, conforming guidelines require two years of tax returns (for full doc) or two years of business licenses (stated/NIV).   We provided a 30 year fixed mortgage using 6 months bank statements to document her income.   She recently sold that home and is now in her next home which we were able to go "conforming" using the proceeds from her first home for the down payment.

Wife marries a "project" husband (her loving terms, not mine) where his past credit is a mess.  Her credit is fine but he’s the primary wage earner.   They were actually my first subprime loans.   At that time, if you had a mid credit score of 600 or better, you could do zero down.   They barely squeaked in.  However, they did what subprime buyers are suppose to do:  they worked on cleaning up their credit over the two year time of their mortgage had a fixed rate.  They changed their spending habits and were responsible home owners.    They since refinanced after their two year prepayment penalty was up.    Having a mortgage has improved their credit score (as well as working on their credit) and they have benefited from the appreciation that the Pacific Northwest has offered them.

Young couple with three children living with the in-laws.  Money was a little tight as far as the down payment was concerned.  They had decent income and credit that was not quite established yet.   They believed in not having credit cards.   They were able to purchase their first home and move out of the folks house (a good move for everyone, I’m sure!) and later refinanced with higher credit scores and equity they gained by the time their purchase money mortgage was about to adjust.

Home buyers who used subprime mortgages to purchase their home, who had good advice from a qualified Mortgage Professional and who followed that advice, should not be ashamed to be associated with a subprime or alt-a mortgage loan.   They did what you’re suppose to do, use it as band-aid financing.

Home owners who have a subprime mortgage and did not change their habits are probably going to be hurt in this market.   If you currently have a subprime mortgage with an ARM or prepayment penalty adjusting within the next 18 months, please contact your Mortgage Professional as soon as possible so you can start working on your credit.

If you’re part of the first group, be proud!  You improved your credit, manage your debts and spending patterns and became a responsible home owner.   

I hope you’ll enjoy reading an earlier post of mine that I featured at Rain City Guide.  This article was originally written by me on February 13, 2007.   Recently FOX News contacted me about it wanting to speak with some of my successful clients who were once considered "subprime".   It’s too bad I had a real short notice and could not help them out.   The "successful subprime" borrowers outweigh the others by far.  Without further ado…

There’s No Love for the Subprime Borrower

It’s all over the news, we’re hearing about major subprime lenders having to restate their losses and every day, lenders are coming into my office to inform us of changes to their guidelines.   This is all good, right?    It will be tougher to provide loans for home buyers who maybe should be spending more time to learn about budgeting and using their credit cards.    What about the people who are all ready in these programs?

First, allow me to explain the basic dynamics of these loans.  Many of these mortgages are zero down, 80/20s (80% of the loan to value for the first mortgage/20% of the value for the second mortgage).   The first mortgage is typically offers a fixed rate for 2-3 years with a prepayment penalty (the standard is six months interest) that matches the fixed rate period.   In addition, the mortgages may be interest only or amortized at 30, 40 or 50 years.    The rates on these mortgages are completely dependent on credit score.

When I meet with Mr. and Mrs. Subprime, I advise them of their options of buying now using this type of subprime mortgage or that they can work on their credit, job history, etc. and buy later with a better mortgage program.   Because there are no guarantee of what rates will be (or maybe because they know there’s not guaranteed they’ll clean up their act) and because they want to buy a house now, they often opt for the subprime mortgage.   Once this happens, I heavily stress (or Jillayne would say, I lecture —which I’m sure I do) to Mr. and Mrs. Subprime that they have 2-3 years to change their spending habits because once their fixed period rate is over, their mortgage is going to adjust and do so big time.    I let them know that I want them to be in the best position for a refinance into permanent financing (or to have a better mortgage should they decide to sell the home assuming they have any equity) and that the subprime mortgage they are using to obtain their home is temporary financing. 

Many of my clients in these mortgages have done very well and I’m proud of them.   They have taken the responsibility of owning a home and having a mortgage to heart.  I’m able to restructure the original mortgage and improve their situation greatly.   The concern is for Mr. and Mrs. Subprime who just didn’t get the hang of it.   They continued to charge up their credit cards, they bought or leased a new car to go in their new driveway and maybe a new TV, too.   They’ve been sliding ever since the holidays and are now having a tough time paying their mortgages on time.   Maybe they just have one mortgage late.   Their credit is rough at best.   Their fixed period (and prepayment penalty) is over and now they really need to refinance fast because their mortgage has adjusted for the first time—their rate is now 2% higher.  Their situation has gone from bad to worse.    With all the tightening in the subprime market, even if their credit scores and scenarios are the same as when they bought, there may not be a program for them to refinance out of now.   They will be forced to sell (hopefully they have enough equity to pay commissions and other closing costs) or to somehow manage to choke down their increased payments.

I guess this post is a plea of sorts.  If you currently have a subprime loan (especially the type I described) please contact your Mortgage Planner to have your credit reviewed to make sure you’re on the right track to be able to refinance (or have a better loan for when you sell) when the time is due.   Do not assume there will be a program for you if you have not made significant changes to your spending and use of credit cards.   If you’re a real estate agent or loan originator, check in on your subprime clients to let them know of the changes in the industry…see if they need guidance to stay or get on track so they don’t wind up stuck with a higher mortgage payment, being forced to sell or foreclosure.