What would you suggest to homeowners who find themselves in trouble with their equity loans?
Be honest with the lender; call the lender right away. Ask to work out a delay. I think it always pays to be straightforward with the lender because the lender is going to want to work with you to make sure the loan is paid at some point. Nobody wants to get stuck with a house, especially in today's market. Housing prices are stagnant.
What are the danger signals of a bad loan?
“Nobody wants to get stuck with a house, especially in today's market.”
I don't think we've seen many dishonest lenders. What we have is some dishonest mortgage brokers - folks who help you with the paperwork and send it off to the lenders. The danger that people talk about is if the mortgage broker is calling you to refinance a loan that you just took out six months ago or so. This is called flipping. Often the mortgage lender has a conflict of interest because the mortgage broker gets commission and fees for every time you refinance a loan. So flipping is a major issue.
Where can borrowers turn if they feel their mortgage broker has misrepresented the loan or if they don't receive the good faith estimate?
Most states have consumer protection offices. The federal regulators: Federal Reserve, U.S. Department of Housing and Urban Development, Office of Thrift Supervision, Federal Trade Commission, Federal Deposit Insurance Corp., National Credit Union Administration and Office of the Comptroller of the Currency are helpful. For a complete listing of federal regulatory addresses, visit federalreserve.gov.
What other things do you see coming down the pike?
Subprime lending and foreclosures are big issues. I can't imagine much more than that.
Is subprime borrowing ever a good idea?
“The old rule of thumb was that a FICO of less than 620 or 630 was considered subprime, but now that's tightened up to 670 because lenders have gotten more careful in their lending standards.”
Subprime borrowing is borrowing when you don't have a perfect credit record. The term generally refers to mortgage debt. It's often referred to in its FICO score, which was published by Fair Isaac. The old rule of thumb was that a FICO of less than 620 or 630 was considered subprime, but now that's tightened up to 670 because lenders have gotten more careful in their lending standards.
Subprime borrowing can be a dramatically bad idea if the borrower can't pay the loan back. But, for folks who have a blemished record, it gives them a chance to re-establish themselves and buy a home. Again, if you borrow more than you can pay back, you're going to be in a worse position than you were to begin with. But, I think it plays a very useful role in society.
Subprime also includes no-doc loans. We're finding out a lot of people fudged their income. But it made a lot of sense for folks with erratic income, such as actors and startup entrepreneurs. They may not be taking a salary because they're putting all their income into the business. Those are the people I'd want to lend to.
Will consumers with good credit be affected?
Yes, in that the lenders are going to take a second look before they agree to take the loan. There will be more scrutiny. The rates are going to go up, but not just because of this.
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