Smalltownbanker

Was Subprime Lending Just as Dishonest as Madoff?

Subprime lending has been around for a long time however in the 1980's the loan to value was always low. At that time Subprime lending was also primarily to existing homeowners who were in trouble because of life circumstances but had once been A Credit borrowers.

NO-DOC loans have also been around but it was not until the late 90's that these loans began to be offered at even a 90% loan to value and at that time the credit score requirement was 720+.

The problems began when purchase money subprime loans at high loan to value percentages started being made to applicants whose credit histories had always sucked. With NO-DOC loans towards the end a 620 credit score could get you a 100% mortgage on a home which was generally over valued by the appraisal process.

New Century Financial used to claim that the average credit score of their Sub-Prime borrower was 680. That was simply not true.

Mortgage underwriting is like evaluating the strength of a 3 legged stool. The 3 legs are credit, capacity and collateral. By 2006 lenders were expecting these stools to simply levitate and hold themselves up because they were underwriting to stated income with credit scores as low as 600-620 with appraisals that were questionable at best. Failure was inevitable.



On Dec 26 08:52 AM John Preston wrote:

> Not so brilliant....the general economy....investment advisors....educationa...
> counselors....all of these...and more... require THE FOUR RULES ABOVE....
>
>
> FIrst of all, subprime lending began years ago...I met my first subprime
> lender in 1981...so any performance history should have been known...
>
>
> Second, I saw no doc/stated income loans beginning in 1984...so these
> ALT loans are not new....and their performance history should be
> known....
>
> Third...in 2006, my subprime clients had higher credit scores than
> did my conforming/GSE clients....and several of my Subprime lenders
> said that their average credit score was in the 650 range...
>
> Fourth, all aspects of theeconomy require new customers and money
> regularly to function.....
>
> The root of the housing problem is in the lack of consistency in
> credit guidelines...what ever the rules ... we need to keep them
> consistent...