The blame of the housing crisis has at times been put on President Clinton, who was urged by minority leaders, when he was in office, to expand homeownership opportunities. As a response, President Clinton urged lenders to offer more flexible loan programs, to help minority families, who were otherwise left out of the dream, have a chance at homeownership.
The guidelines that Fannie Mae and Freddie Mac offered were strict and required 20% down; money that most minority families did not have. The lack of down payment kept many minority families from attaining the dream of homeownership. As lenders began to relax their guidelines, Subprime mortgages began to grow, 500% in a few years.
Subprime lending offered alternative financing options that had more relaxed underwriting guidelines as it pertained to income documentation and credit. Up until the birth of Subprime Lending, Fannie Mae and Freddie Mac were the two institutions that lent money to banks to assist homeowners. Their guidelines were, however, strict and required a 20% down payment.
Subprime lending also offered alternative income verification, such as bank statements, and many stated income programs for those who did not fall under the traditional W-2 employee status. The programs that Subprime lending offered were needed to give Americans a chance at homeownership. Small business owners could finally qualify for mortgages, and people who may have had some setbacks with their credit, had a chance at homeownership.
Consumers flocked to buy homes when lenders offered little or no money down, creating a frenzy of new untrained loan officers entering the industry to capitalize on the demand for Real Estate. Loan officers were often not trained, or trained to provide consumers with loan programs that were often higher than they would qualify for, with added junk fees and unnecessary pre-payment penalties. Many Subprime Programs were good for consumers. It was not Subprime Lending; it was the abuse and stretching of underwriting guidelines that got us into trouble. To top it off, consumers were placed into exotic mortgages by loan officers and brokers who were given incentives by lending institutions to do so.
A perfect example is the incentives Countrywide and other banks gave to loan officers who placed consumers in pre-payment penalties on option arm loans and encouraged them to raise a consumers margin, a key component in a consumer’s interest rate. (loans that adjusted monthly and have a negative amortization affect on a mortgage, option arm loans are broken down in the Mortgage Types Chapter.) The higher loan officers raised a consumer’s margin, the more money they received from the bank and the longer prepayment penalty, the more money the lender paid the loan officer or broker
Loan officers were getting as much as a 4% rebate home negative amortization or option arm loans they sold to clients, that is, $12,000 in rebate fees on a $300,000 loan, not to be mistaken with other fees charged up front. Great incentives were given to loan officers and wholesale account executives for selling adjustable mortgages to consumers. The reason was simple – adjustable mortgages were more in demand to investors because they anticipated future earnings when the consumer’s loan rate adjusted.
Meaning that if you were paying 7% on a loan for two years, the investors hoped they could make more money on your loan when it adjusted in 2 years. Little did many investors know that lenders created relaxed guidelines and consumers could barely afford the payment they initially received, let alone a rise in mortgage payment that has, at times doubled. Investors did not realize they may have been buying loans secured by Real Estate, but they were not worth much because the consumers who were responsible for the payments, could not afford the mortgages. More and more relaxed guidelines increased when President Bush encouraged lenders to take America’s homeownership challenge to get 10 million more minority families in homes by 2010. The challenge was made by President Bush in 2001. The reason this challenged was placed, was to help save a suffering economy. While 75% more Caucasian families owned homes, only 48% of minority families were homeowners.
To help increase the activity in the Real Estate Industry, minority families were the untapped market. To lenders this became the emerging market place and special divisions and programs were set up. Some such division, such as BNC mortgage, a once Subprime Arm of WAMU, used tactics to secure minorities into homes that were less than ethical. The more flexible the programs became, demand increased dropping interest rates and rising property values. This sent Americans to refinance and take out over 2 trillion dollars of equity, out of their homes in 3 years or less, during the peak of the refinance boom. Americans have less equity in their homes now than in the 80’s. The unfortunate part, is that many families who refinanced their homes, were placed in exotic type mortgages, that when adjusted or the term has ended, would make a consumer’s mortgage not affordable. Such a tactic was also used when consumers purchased a home.
Over 9 billion dollars in hard earned equity was reported to be lost each year due to predatory lending practices prior to the mortgage crisis. The few billion each year, has now turned into a global financial crisis. Many families are victims today and still do not realize they are paying too much on their mortgage. Released White House statistics showed that over 50% of American Families were paying a higher interest rate on their mortgage than they qualified for, losing thousands of dollars each year in equity. HMDA stats showed the average African American and Hispanic family, with good credit scores, received a 2-3% higher interest rate on their mortgage than a Caucasian buyer with the same credit.
The United States Home Mortgage Disclosure Act (or HMDA, pronounced HUM-duh) was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. On a $300,000 loan, a family who pays 2% more would lose $700 per month and over pay by $300,000 in interest over 30 years.
The crash of the mortgage industry has shut down most of the Subprime lenders and guidelines have tightened; fewer borrowers will qualify, fewer will refinance and more short sales and foreclosures will take place, affecting the value of surrounding properties. Consumers have less money to spend, and all of this further weakens a falling real estate market.
We have gone backwards and now homeownership will be harder to attain for the average homeowner, affecting those that were already victimized.
Subprime Lending expanded the opportunity for more families to become homeowners, the abuse of the predators is what caused the mortgage crisis.