What are sub-prime mortgages? Sub-prime loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. Sub-prime borrowers are generally defined as individuals with limited income or having FICO credit scores below 620 on a scale that ranges from 300 to 850. Sub-prime loans have a much higher rate of default than prime loans and are priced based on the risk assumed by the lender.
Many buyers and sellers in the Tulsa housing market should be asking that question, and all should be wondering how it could affect sales in this area. Typically, sub-prime customers are those who do not qualify for prime market rates because of a blemished or limited credit history. Sub-prime customers are therefore charged a higher interest rate to compensate for the increased probability of future default. There are deals on the table right now in our area that may not close because of the problems seen recently in the sub-prime market. We have buyers that were "approved" last month for a purchase money mortgage, but many of the lenders that had approved the mortgages have suddenly closed their doors and are in the process of going bankrupt. This has left both sellers and buyers all across the nation who are unable to close on the sale or purchase of their home. The Tulsa area economy has been stable since the mid 80s, when businesses were forced to diversify and bring new jobs to our area. There may be some buyers unable to purchase a home for a while due to credit issues and the quickly changing landscape of the mortgage industry. It is my opinion that we live in a region that will not feel the impact of these changes as severely as east and west coast cities and towns, where people were given loans that have accelerating interest rates and increasing payments that eventually will lead them to foreclosure. Should this happen in our area, it could negatively impact values.
According to the 2001 Expanded Guidance for Sub-prime Lending Programs, a sub-prime loan refers to "... the credit characteristics of individual borrowers. Sub-prime borrowers typically have weakened credit histories that include payment delinquencies and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Sub-prime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers." One of the reasons for lending to sub-prime borrowers is that, besides their profit potential, banks are obligated by law to offer lending services to clients of all income and credit levels. The Community Reinvestment Act, passed by Congress in 1977 requires that insured financial institutions such as commercial banks offer equal access to lending to all those in an institution's geographic assessment area. Before passage of the CRA, many lenders excluded low-income neighborhoods from their lending products. Many lenders not affiliated with banks have also been tightening their standards. The trend picked up after government-sponsored mortgage financier Freddie Mac said on February 27 that it would no longer buy high-risk mortgages. Ben Bernanke, the chief at the Federal Reserve is also urging Congress to boost regulation of Freddie Mac and its government sponsored counterpart, Fannie Mae.
For more information about this topic or other mortgage related questions, please contact mortgage expert Jeff Sargent of Pinnacle Mortgage Corp/a division of ONB bank @ 918.481.6833.
The government can't regulate independent lenders, but lenders will continue to tighten standards anyway over the next year to cauterize their losses, Plesser says. "In general lenders are being much more careful."
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