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Sub Prime Lending

Subprime Lending

Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.
Many have questioned why minorities appear to be over-represented in the subprime lending market. Studies reveal that even in upper-income African-American neighborhoods one is one-and-a-half times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan.

Some allege this disparity to be attributed to subprime lenders purposefully marketing to African-American communities-what some have called reverse redlining. They allege lenders will provide loans to these communities, but at a higher cost and with less favorable conditions.

Some facts about subprime lenders:

• Home refinance loans account for higher shares of subprime lenders' total origination than prime lenders' originations
• Subprime lenders originate a larger percentage of their total originations in predominately black census tracts than prime lenders
• Subprime lenders are more likely to have terms like "consumer," "finance," and "acceptance" in their lender names

Proponents of subprime lending

Individuals who have experienced severe financial troubles are often labelled as higher risk and therefore cannot obtain conventional financing. These individuals may have had job loss, previous debt or marital problems, or unexpected medical issues. Often, these events were unforeseen and cause a major setback in finances. As a result, late payments, charge-offs, repossessions and even foreclosures may result.

Due to these previous credit problems, these individuals may be precluded from obtaining any type of loan for an automobile. To meet this demand, lenders have seen that a tiered pricing arrangement, one which allows these individuals to pay a higher interest rate, may allow loans which otherwise may not occur.

From a servicing standpoint, these loans have higher collection defaults and experience higher repossessions and charge offs. Lenders use the higher interest rate to offset these anticipated higher costs.

Provided a consumer will enter into this arrangement with the understanding that they are higher risk, and must make diligent efforts to pay, these loans do indeed serve those who would otherwise be underserved. The consumer must purchase an automobile which is well within their means, and carries a payment well within their budget.

Criticisms of subprime lending

Capital markets operate on the basic premise of risk versus reward. Investors taking a risk on stocks expect a higher rate of return than do investors in risk-free Treasury Bills, which are backed by the full faith and credit of the United States. The same goes for loans. Less creditworthy subprime borrowers represent a riskier investment, so lenders will charge them a higher interest rate than they would charge a prime borrower for the same loan.
To avoid the initial hit of higher mortgage payments, most subprime borrowers take out Adjustable-rate mortgages that give them a very low initial interest rate of around 4%. But with annual adjustments of 2% or more per year, these loans typically end up charging around 10%. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,470. A 6-percentage-point increase in the rate caused slightly more than an 85% increase in the payment.

Your Options Against Foreclosure

Foreclosure may occur. This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount.

Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.

Q: What Should I Do?
DO NOT IGNORE THE LETTERS FROM YOUR LENDER. If you are having problems making your payments, call or write to your lender's Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
Stay in your home for now. You may not qualify for assistance if you abandon your property.
Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you. These agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.
Q: What Are My Alternatives?
You may be considered for the following:

Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.

Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.

Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.

You may qualify if:
your loan is at least 4 months delinquent but no more than 12 months delinquent;
you are able to begin making full mortgage payments.

When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full.

The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.

Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan.

You may qualify if:
the loan is at least 2 months delinquent;
you are able to sell your house within 3 to 5 months; and
a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but it is not as damaging to your credit rating as a foreclosure.

You may qualify if:
you are in default and don't qualify for any of the other options;
your attempts at selling the house before foreclosure were unsuccessful; and
you don't have another FHA mortgage in default.

For More Info, check out The Note Service

Understanding Foreclosure - Foreclosure Scams

Bankruptcy foreclosure fraud is a growing problem that threatens the integrity of
the bankruptcy system as it takes advantage of families in distress. The United
States Trustee Program is working hard to identify bankruptcy foreclosure scams
around the country and to take appropriate action through criminal referrals and
civil suits. Be especially alert to the following:

> Equity skimming: In this type of scam, a "buyer" approaches you, offering to
get you out of financial trouble by promising to pay off your mortgage or give you a
sum of money when the property is sold. The "buyer" may suggest that you move
out quickly and deed the property to him or her. The "buyer" then collects rent for a
time, does not make any mortgage payments, and allows the lender to foreclose.
Remember, signing over your deed to someone else does not necessarily relieve
you of your obligation on your loan.

> Phony counseling agencies: Some groups calling themselves "counseling
agencies" may approach you and offer to perform certain services for a fee. These
could well be services you could do for yourself for free, such as negotiating a new
payment plan with your lender, or pursuing a pre-foreclosure sale.

> Probably the most widespread foreclosure scam involves the use of
foreclosure notices to identify individuals facing the loss of their homes. The scam
perpetrator contacts the home owner, advertising "mortgage assistance" or
"foreclosure counseling" and promising to work out the home owner's problems
with the mortgagee or to obtain refinancing for an up-front fee typically ranging
from $250 to $850. The perpetrator may direct the home owner to "fill out some
forms," including a blank bankruptcy petition. The perpetrator subsequently files a
bankruptcy petition in the home owner's name. The bankruptcy petition invokes the
automatic stay, the imminent foreclosure is postponed, and the home owner stops
receiving collection calls and letters.


In most cases, the perpetrator does not tell the home owner about the
bankruptcy petition, instead convincing the home owner that foreclosure activity
has ceased because mortgage problems have been worked out. The perpetrator
may tell the home owner that he or she might receive a notice from the court, which
should be ignored. The home owner may even be told that the perpetrator has gone
to court on the home owner's behalf. No one appears at the Section 341 meeting,
the case is dismissed, the foreclosure goes forward, and the home is lost.
The United States Trustee Program welcomes information that will help detect
bankruptcy foreclosure scams, and is indebted to those trustees, judges,
clerks, secured lenders, bankruptcy attorneys, and private citizens who
report suspicious fact patterns. They coordinate with all participants in
the bankruptcy system to eradicate this destructive form of fraud. You
can find information online about the United States Trustee Program at
http://www.usdoj.gov/ust. For Your Information Foreclosure Scams
For - Understanding Foreclosure -
Sources: Federal Citizen Information Center, HUD, VBA, USDOJ
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Commercial Real Estate Futures

The Chicago Board of Trade, the No. 2 U.S. futures mart, said on Monday it will launch commercial real estate futures on Feb. 21.

The new contract, based on the Dow Jones U.S. Real Estate Index, will allow market participants to bet on changes in the real estate sector of the stock market and manage commercial real estate exposure, the CBOT said.

The futures will reflect the value of the index, which is comprised mainly of real estate investment trusts, securities that track the underlying commercial real estate market.

Contracts will be cash-settled and trade on CBOT's electronic platform. The exchange plans a market maker program to create liquidity in the new product.


CBOT should get its product to market before the Chicago Mercantile Exchange, the largest U.S. futures exchanges, launches a related product.

CME said in September it was teaming with Global Real Analytics to launch commercial real estate futures and options based on a series of GRA indexes — national and regional, and for four separate property types. A launch is still expected in the first quarter.

CME already trades a suite of housing derivatives based on the S&P/Case-Shiller home price indices.

Buying A Home - Mortgage Information

The decision to buy a home can be one of the most valuable and important investments one can make. Therefore it is important that you are familiar with the mortgage process so that you can wisely finance your home. Essentially, a mortgage is just a loan that is used to finance the purchase of property. The property itself is used as security to ensure repayment until you have repaid the entire amount plus interest. There are many types of mortgages on the market and finding the right one can be an overwhelming project. The best approach is to divide the process into manageable tasks. Sit down with a mortgage professional and examine the advantages and disadvantages of all available options to determine which product is best suited to your current situation and future plans.

How to Find the Right Mortgage

Estimate how long you expect to live in the house. If the answer is less than three to five years, consider an Adjustable Rate Mortgage (ARM), which typically starts out with a lower rate. If you plan to live in your new home longer than five years, a fixed-rate mortgage offers protection against rising interest rates.

Shop around for mortgage rates. Banks, credit unions, and mortgage companies all offer mortgages. Compare at least six lenders in your area.

Add up all the costs for each lender. Include fees, points, closing costs, etc., to arrive at the total mortgage cost for each lender.

Mortgage Terms

Amortization Period:The period of time after which, if all monthly payments are made on time and in full, the loan will be paid out.

Down Payment:The amount of money provided by you, the purchaser toward the price of the property (not including legal fees or other acquisition costs).
I
nterest Rate:The actual cost of borrowing money, charged as a percentage of the outstanding amount owed. Usually compounded on a monthly basis.

Mortgage Amount:The total amount of money to be borrowed by you, the purchaser, and applied toward the price of the property.

Prepayment Privileges:The right of the borrower to pay out all or part of the outstanding principal before it comes due.

Term of the Mortgage:The period of time during which the loan contract is active. During this period, you the Borrower makes periodic payments (usually monthly) to the lender and at the end of the term the balance of the loan becomes due and payable.