By Mike Heayn Real Estate 101
ABOUT TWO YEARS AGO, YOU COULD GO to a federally regulated lender, fill out an application, have your credit pulled and get a loan. Known as a subprime loan, many borrowers were able to qualify due to lower underwriting and credit guidelines. Most subprime loans did not require tax returns, income verification or other documentation, making the loan ‘low-doc’. On Friday, June 29, the subprime world began to change. New federal subprime guidelines were issued, ending the days of easy subprime lending.
Due to the record high levels of borrowers who defaulted on subprime loans, new guideline policies were recently implemented. Now a borrower needs to provide documentation proving income. In the past, many borrowers were unprepared and unable to make payments after the subprime loan adjusted from a fixed rate. Payments often doubled, leaving borrowers no way of making the mortgage payment. Under the new guidelines, lenders have to qualify a borrower based on their ability to pay back the loan after the loan adjusts.
The new guidelines also required lenders to mail documentation to borrowers at least 60 days in advance, telling them that their payment is going to change. The thought is if a borrower is aware of an upcoming change to their mortgage payment, they have time to save and prepare for the adjustment. If need be, they even have time to sell the house.
The new guidelines are just that, guidelines and have not been passed into law. However, large lenders such as Washington Mutual and Wells Fargo — two of the largest subprime lenders — said they would adhere to the new guidelines.
Not everyone thinks the new guidelines are beneficial. Some mortgage brokers who focused on subprime lending have discovered a shrunken pool of available lenders. Mortgage brokers say the new guidelines prevent the people who need homes the most — the lower class — from achieving the dream. However, it is tough to argue with someone who lost his or her home due to payment hikes.
Overall, less people will be able to qualify for subprime loans since the new requirements are more stringent. However, not qualifying may not be a bad thing. If you cannot afford a home, you should not burden yourself with a mortgage payment. The benefits of the new guidelines far outweigh the costs, as less people will lose their homes in the future.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342 or
Originally published in the Santa Monica Daily Press print edition on July 4, 2007. Read the original PDF.