Tuesday, January 15, 2008

How to understand Basics of sub prime Mortgage Crisis - Part II


Subprime mortgage crisis is a crucial topic for all of us to understand, and we really need to keep an eye on this.


Difficulty: Challenging

Things You'll Need

  • Be ware of this because this will impact economy not only domestically but globally.



Step One

First, the good news is that the development of the sub-prime market has made mortgages (and home ownership) available to a segment of the population that otherwise would have been shut out of the market. The bad news is that some borrowers who are eligible for loans from mainstream lenders end up in the sub-prime market. They are prime borrowers but they pay sub-prime prices.

Step Two

Why this happens? This happens partly because of the difficulties some borrowers can have in determining whether or not they qualify in the mainstream market. Requirements in underwriting can differ from one lender to another, so it is quite possible that a borrower with handicaps, who is not eligible at one lender, will be eligible at another.

Step Three

However, the main reason (some prime borrowers end up paying sub-prime prices) is that they are solicited by sub-prime lenders and go along with the deal pitched to them without ever contacting a mainstream lender. This is sometimes referred to as so-called "steering". Very few sub-prime loan officers will give up a commission by referring a qualified applicant to a mainstream lender. The deal will very likely go down at sub-prime prices, therefore, regardless of how qualified the borrower may be.

Sub-prime lenders do market aggressively to home-owners who already have mortgages. A major pitch is the cash that borrowers can take out of their properties through a cash-out refinance. Another common pitch is the lower payments which is possible on interest-only mortgages and option ARMs

Step Four

Here are some guidelines to guard you:
• Always check your eligibility first with mainstream lenders. On-line checking is available easily. Some sites would be Eloan.com, Amerisave.com, and NationalMortgageAlliance.com who are all Upfront Mortgage Lenders.
• Do not respond favorably to a solicitation without first checking other options. If you deal with only one loan provider, make your selection by simply referring the yellow pages than by accepting a solicitation.
• If you can’t qualify with any of them, an Upfront Mortgage Broker will be your next bet. They may charge sub-prime applicants a little more because they require more time. You will know what they charge, however, and you will know that you are getting the wholesale price posted by the lender, which means you won’t be exploited.

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