What’s in a Name? You could be sub-prime and not know it.
Given that this current financial crisis supposedly started with problem mortgages, how do you tell if you have one of those? I have this gut feeling that there are more people out there who have sub-prime and alt-a mortgages and don’t even know it. After all, I’ve never heard a mortgage broker try to sell something with a name like sub-prime or alt-a, but I know that at least one of my mortgages (I have two — on two different houses) definitely IS from one of the despised categories.
So what does it even mean to have a so-called “sub-prime” mortgage? Here is the technical definition of sub-prime according to Wikipedia:
“Subprime borrowers have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience. Although there is no standardized definition, in the US subprime loans are usually classified as those where the borrower has a credit score below a particular level, e.g. a FICO score below 660. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards. Subprime could also refer to a security for which a return above the “prime” rate is received, also known as C-paper. In the United States, mortgage lending specifically, the term “subprime” can be applied to “non conforming” loans, those that do not meet Fannie Mae or Freddie Mac guidelines, generally due to one of an array of factors including the size of the loan, income to mortgage payment ratio or the quality of the documentation provided with the loan.”
So if that’s the definition of sub-prime, how does that vary from “alt-a?”
Again, from Wikipedia:
“An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or “prime”, and less risky than “subprime,” the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Within the U.S. mortgage industry, different mortgage products are generally defined by how they differ from the types of “conforming” or “agency” mortgages, ones guaranteed by the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
“There are numerous factors that might cause a mortgage not to qualify under the GSEs’ lending guidelines even though the borrower’s creditworthiness is generally strong. A few of the more important factors are:
- Reduced borrower income and asset documentation (for example, “stated income”, “stated assets”, “no income verification”)
- Borrower debt-to-income ratios above what Fannie or Freddie will allow for the borrower credit, assets and type of property being financed
- Credit history with too many problems to qualify for an “agency” loan, but not so many as to require a subprime loan (for example, low scores or serious delinquencies, but no recent charge-offs or bankruptcy)
- Loan to value ratios (percentage of the property price being borrowed) above agency limits for the property, occupancy or borrower characteristics involved
“In this way, Alt-A loans are “alternatives” to the gold standard of conforming, GSE-backed mortgages.”
Okay, so an alt-a is a type of sub-prime mortgage but generally not as bad as a pure sub-prime, whatever that is. I think the key distinction in these things is the FICO or credit score. Alt-A borrowers tend to have scores above 660.
So do you have a sub-prime mortgage? If you have a non-conforming loan like a jumbo you are some form of sub-prime no matter how high your credit score of how low your loan-to value ratio. If you have a low-doc or a no-doc loan it is non-conforming and also sub-prime even if you aren’t. You have a sub-prime loan if your mortgage is interest-only or some funky variety like an Option ARM.
As a result there are probably a lot more sub-prime mortgages and mortgage holders than you’d expect. I’m one because I have a jumbo. Are you?
Sub Prime neighbors are So Orwellian. Walk into the gumbo of their lingo and your brain is muck.
Isn’t this whole deal the Balloon Loan Crisis? Who created the Balloon Loans? What is their job?
I know the job of a young husband is to get ownership of the home place for the family.
What is the banker’s job?
Time to read Confucius on the Rectification of Names.
If we cannot call a thing by its correct name, the people cannot determine what is meant and justice cannot be found. (roughly) Ah, the internet…. more precisely:
“If names be not correct, language is not in accordance with the truth of things. If language be not in accordance with the truth of things, affairs cannot be carried on to success.
“When affairs cannot be carried on to success, proprieties and music do not flourish. When proprieties and music do not flourish, punishments will not be properly awarded. When punishments are not properly awarded, the people do not know how to move hand or foot.”