So I’ll be the first to admit there’s been an awful lot of well-publicized malfeasance in the mortgage world that has contributed to our current state of affairs, but it all just makes me wonder – which came first? Did credit dry up as a result of defaults? Or are defaults rising because subprime borrowers can’t get credit any more? Either one of these possibilities certainly impacts the nest we’re all roosting in now, which is the one where housing prices are dropping faster than a brick dropped off the Sears Tower.
Personally, I think sliding house prices could largely be shored up by the reintroduction of new credit instruments into the mortgage market, most particularly those of the subprime variety. The problem with subprime is that it represents a particular segment of our economy whereby some borrowers just simply don’t like paying their bills. Sure, there is always going to be a percentage of any group that doesn’t fit the model – such as those who are circumstantially relegated to subprime – but the majority of the subprime borrowers are subprime to stay. More holistically, the term “subprime” describes how a particular borrower manages their credit and financial affairs. They simply don’t have the tools in their limited arsenal to get their credit scores (and other important qualifying criteria) into the black. One of my account executives described it perfectly the other day when we were talking about a client who had a bankruptcy a few years ago and continued to be late on payments to creditors since – “She’s going to be subprime all of her life”. So even though this client makes six figures and her payment only represents 24% of her income (FNMA guidelines generally allow up to 33%) she simply cannot qualify for a decent loan. yet she’s already a homeowner. So would allowing her to refinance into another subprime product be better for her, or should she be foreclosed upon because the product doesn’t exist any more and her ARM is resetting?
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