Subprime Loans Harder to Come By
Posted by Frugal on February 5th, 2007
Due to the recent blow-up in subprime mortgage companies, it is no surprise that subprime borrowers are facing tougher qualications for mortgages. The interest rate has gone up by at least one percentage point, besides tracking the recent increase in the treasury market.
Reading from the above link, and checking with my friend in mortgage business, it is still very surprising to me that the current lending standards are not as tight as I think it should be:
Higher credit scores. Previously, borrowers with a FICO credit score as low as 570 (out of 850) could qualify for a single loan financing 100 percent of their home purchase, Carmona said.
“Now, across the board, it’s jumped up to a 600 FICO score for an 80/20 loan,” Carmona said, in which a second loan has to be taken out to finance the remaining 20 percent of the home value
A loan with no down payment has zero buffer zone for a borrower whose net worth is close to zero to mail back the keys to the bank, especially when
- the mortgage payment is higher than repaying ability,
- or the mortgage payment is higher than rent,
- or the equity in housing is a big negative number.
Such is a get-rich-quick dream turning into a destruction of one’s own credit report file, and the bank will need to eat up all the losses from the fall of housing market, PLUS any difference between the appraisal and the actual housing value.
I think 600 FICO is really low by my standard. To think that a 600 FICO score is worth some $20K to $50K or more in the lender’s mind is a little bit ridiculous. Even though the bank can theoretically sue to get back the money due on the 20 portion of the 80/20 loan, how are you going to find the missing money of $50K when the person just doesn’t have it?
Here is a list of subprime mortgage lenders going bust or reducing operations. All of which went down because the investors of the mortgage loan demand buy back on the EPD (Early Payment Default) or that their packaged loan has become toxic that it is NOT investable:
- OwnIt (partialy owned by BofA) closed door on 12/7/2006.
- Option One (owned by H&R block) for sale, cutting workforce by one third, and earning forecast by 25%.
- Equibank / Wachovia, an immediate shutdown.
- MLN temporarily stop funding loans.
- Metropolitan Mortgage in criminal suit.
- Mandalay Mortgage shut down.
- Kirkland Mortgage in Seattle shut down.
For more fireworks in the subprime mortgage land, you could visit the Implode-Meter.
Frugal at My 1st Million At 33.com
More related posts:
Digg it Del.icio.us Reddit Furl BlinkList Newsvine Yahoo MyWeb
February 6th, 2007 at 9:37 pm
I’ll probably never be able to buy a home. My FICO is 500 (medical/unable to work for 1 yr therefore iman;e to pay bills, chargeoffs and judgments, cannot resolve credit issues on current min wage income) and unlikely to improve any time soon.
February 6th, 2007 at 9:40 pm
OMG, there really IS an Implode-O-Meter!
February 6th, 2007 at 11:52 pm
Terry,
I remember you from your first comment. My partner ML has given you good advice on preserving your money-buying power in the last itulip post.
I truly wish situation will work out better for you. I suggest you not to think that far such as buying a home. Are you able to get any free vocational training from government and get into some paralegal or medical related fields? Improving your wage income is the first step to a better financial future.
By the way, I forgot to include the link for the Implode-Meter. I just added it now.
February 12th, 2007 at 6:38 pm
RE WAY TO GET INTO RE. WE DID EVERYTHING RIGHT’BOUGHT THE SMALLEST HOUSE, GOOD NEIGHBORHOOD, PUT IN LOTS OF SWEAT EQUITY–WHEN READY TO SELL THE STATE WENT BANKRUPT! PEOPLE LEFT IN DROVES; IT TOOK OVER 1 YEAR TO SELL AND WE TOOK A 30% HAIRCUT. REALLY HAPPENED–1962 IN MICHIGAN. FRIEND LOST JOB IN DEFENSE DOWNTURN IN SAN DIEGO,(1968) HOUSE FORECLOSED, HAD TO START ALL OVER AGAIN. DON’T THINK THESE THINGS CAN’T HAPPEN AGAIN. RE DOESN’T ALWAYS GO UP. IT WAS ONE OF THE BEST INVESTING LESSONS I LEARNED.
February 16th, 2007 at 4:25 am
Thanks for sharing your real estate experience.