Subprime Bailout

[Beestie]

Originally Posted by deadbeater

There are cases in which people with excellent credit got conned into making subprime loans when they should have had fixed loans.

Doubtful. When people with excellent credit get a subprime loan it pretty much means that they bought a house they couldn't afford and had to resort to sub-prime because they didn't have the income for a conventional loan.

There's nothing wrong with sub-prime loans. There is everything wrong with irresponsible consumers.

When people with fixed incomes are using "stated income" sub-prime loan products, then there is a good chance they are going to have problems when interest rates rise.

But even with all that, according to the article, only 1 in 12 loans are sub-prime and only 1 in 10 sub-primes are delinquent (delinquent just means behind - not foreclosed) and not all delinquent loans go to foreclosure - let's assume 25% do - I doubt its even half or a quarter that much. That means that overall, there is one additional foreclosure for every 480 loans because of the existence of sub-prime loans.

Now out of the 480 loans (for which there is one foreclosure) how many people now own a house that but for sup-prime would have been shut out of owning a home? 39!

So by introducing subprime loans, 40 people get a house that otherwise wouldn't and one person doesn't get to keep it.

And if those 40 were just a little more careful about how much house they bought then the 1 in 40 could easily be changed to 1 in 100.

The system isn't broke but I do think that using "stated-income" on subprime loans should be made unlawful.

edit:
Stated-income is where you tell the mortgage broker/lender what you make and the number is not verified - no documentation is submitted to support the figure it is just accepted without question.