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Subprime lending refers to the extension of credit to higher-risk borrowers, a practice also commonly referred to as “B/C” or “nonconforming” credit. Loans to subprime borrowers serve communities that may have been underserved by other lenders in the past. In recent years, subprime mortgage lending has grown dramatically, with over 90% of all subprime mortgage loans made in or after 1993. By the end of 1996, the total value of outstanding subprime mortgage loans exceeded $350 billion. In 1997 alone, subprime lenders originated over $125 billion in home equity loans. Subprime loans have become a significant and growing part of the home equity market. Subprime originations constituted 11.5% of the total home equity lending market in 1996; by the first half of 1997, they had grown to 15.5% of this market. At the same time, the composition of companies involved in the subprime market is evolving. One of the dramatic changes in this market has been the growth in subprime mortgage lending by large corporations that operate nationwide.

The subprime mortgage market has flourished because such lending has been profitable, demand from borrowers has increased, and secondary market opportunities are growing. Lenders typically price subprime loans to consumers at rates of interest and fees higher than conventional loans. Higher rates and points can be appropriate where greater credit risks are involved, as is often the case with subprime loans. Critics assert, however, that the interest rates and fees charged by some subprime lenders are excessive, and much higher than necessary to cover increased risks, particularly since these loans are secured by the value of a home. Some attribute lenders’ high rates on first mortgages in part to federal deregulation of certain state interest rate ceilings in 1980.

The relatively high profit margins in the subprime mortgage industry have fueled demand in the secondary market from investors seeking higher-yielding securitized assets, especially in an environment of generally low interest rates. In 1996, the subprime mortgage sector issued over $38 billion in securities, the largest increase in securitizations for any lending industry sector in that year. The secondary market’s expansion has, in turn, helped to sustain growth in the industry by enabling lenders to raise funds on the open market to expand their subprime lending activities. Freddie Mac, one of the primary government-sponsored enterprises involved in the purchase of mortgages, recently announced plans to enter the secondary market in subprime loans by purchasing significant numbers of “A minus” subprime mortgages by 1998 and the higher-risk “B and C” loans by 1999.

The market for subprime loans is expected to continue growing. Credit card delinquencies are rising and personal bankruptcies are at record levels, which negatively affect borrowers’ credit histories, pushing more consumers into higher risk categories. Meanwhile, consumer spending continues to be strong. Together, these factors increase the market for subprime loans. In addition, more borrowers generally may be seeking home equity loans due to the change in the tax code limiting allowable interest deductions to those on a first mortgage.

In the past, homebuyers more or less had limited mortgage loan options. These days, there are more options than you can shake a stick at, but heres a primer on the basics.

Mortgage Loans

With the real estate market explosion over the last 10 years, a call has gone out for unique mortgage loan programs. Bankers have been more than happy to answer the call. For many borrowers, traditional mortgage loans still fit the bill. Heres an introduction.

1. Conforming Loans The loans comply with requirements set down by Fannie Mae and Freddie Mac, two government sponsored entities that buy and sell loans from mortgage lenders. These entities put strict caps on the loans they will buy, with single-family homes having a mortgage cap in the range of $360,000. With the booming real estate market, many areas such as San Diego do not come close to fitting into the conforming loan market since homes average in the $600,000 range.

2. Non-Conforming Loans Known as Jumbo Loans, these mortgages are written for loans that exceed the $360,000 cap mentioned previously. They tend to have slightly higher interest rates, but are readily available.

3. Bad Credit Loans In the mortgage industry, mortgage brokers often refer to a borrowers paper. This paper refers to people with less than stellar credit. B paper refers to relatively small problems, while D paper refers to bigger issues such as bankruptcy filings. The worse your paper, the more you can expect to pay in interest, points and down payment amounts. You need to carefully determine whether paying these extra penalties makes financial sense.

Interest Rates

With each of the above loans, youll have an option of going with a fixed interest rate or an adjustable rate. Fixed interest rates simply set a definitive interest rate that will be charged over the length of the loan. Adjustable rates typically start at a figure lower than fixed rates, but can be moved up to reflect changes in the cost of borrowing money. In many ways, you are betting whether interest rates will increase in the future.

For a great majority of people, basic mortgage loan options still suffice when it comes to borrowing money. Dont fret if you have problems qualifying for these loans. There are many other options on the market these days.

Imagine landing your dream home. Your credit is a bit shaky, but you manage to get a subprime loan with an adjustable rate mortgage. A few years later the interest rates jump and you can no longer afford to pay. You see an ad for a business thats willing to helpitll pay your mortgage for a modest monthly fee while you get back on your feet. But heres the heartbreak: its a scam. The con artists just take your money and run

Its just one of the latest schemes and frauds being seen these days across the financial services industry.

These scamswhich include plenty of shenanigans with mortgages and subprime loansare costing the nation tens of billions of dollars a year.

Millions of homeowners are caught up in this subprime mess. The Federal Reserve has gotten involved in an attempt to bail out the mortgage loan companies. Criminal charges may be filed against these companies for falsifying records, loaning money to under-qualified home buyers, and not reporting the truth to investors.

These are all good reasons why the US government is squarely focused on cracking down on the largest of these financial crimes, launching proactive initiatives and shifting resources as trends emerge, all the while working hand-in-hand with a host of government and private sector partners.

Currently, investigators are actively pursuing mortgage companies and investment irregularities.

The government is investigating 14 corporations involved in subprime lending as part of our Subprime Mortgage Industry Fraud Initiative launched last year.

The companies come from across the financial services industry, from mortgage lenders to investment banks that bundle loans into securities sold to investors. Theyre also looking at insider trading by some executives.

Traditional mortgage fraud:

In one state alone, more than 1,200 cases open today (up about 40 percent from last year), mostly involving fraud for profit, where groups of straw buyers, realtors, etc. rig schemes to buy properties that are flipped or allowed to go into foreclosure.
Hotspots include California, Texas, Arizona, Florida, Ohio, Michigan, and Utah.

Suspicious activity reports that we review for potential mortgage fraud have grown from 3,000 in fiscal year 2003 to 48,000 in fiscal year 2007. This year, theyre on pace to receive more than 60,000 such reports.

A recent case: In November, the owners of a long-time Minnesota homebuilder called Parish Marketingalong with a bank officer, a closing agent, and otherspled guilty to a $100 million mortgage scheme involving some 200 homes.

If you are a victim of the subprime mortgage madness, contact your bank and see if there are any programs in place to alleviate the pain.

When Should You Refinance Your Mortgage? There are two primary reasons to refinance a mortgage: to get a more desirable rate and terms or to extract cash from the home’s equity. Both of these reasons can of course also be fulfilled!

Rate-and-term refinancing

Rate-and-term refinancing pays off one loan with the proceeds from the new loan, using the same property as collateral. This type of loan allows you to take advantage of lower interest rates or shorten the term of your mortgage to build equity faster. Rate-and-term refinancing refers to a myriad of strategies, including switching from an ARM to a fixed or vice versa. For example, if you have an ARM that is set to adjust upward in a few months, you can refinance into a fixed-rate mortgage. Or if you have a fixed-rate loan and you know you will move in two or three years, you could refinance into a lower-rate 3/1 hybrid ARM.

Cash-out refinancing

Cash-out refinancing leaves you with additional cash above the amount needed to pay off your existing mortgage, closing costs, points and any mortgage liens. You may use the additional cash for any purpose.

For example, say you bought your house for $150,000 a few years ago and borrowed $120,000. Now the house has an appraised value of $250,000 and you owe $110,000. With a cash-out refinance, you could get a mortgage for $150,000. You would pay off the $110,000 you owe and pocket the $40,000 difference, minus closing costs.
Ohio Mortgage Bankers Association

To learn more about Ohio Mortgage options you can check with the Ohio Mortgage Bankers Association, founded in 1961. OMBA is a statewide organization devoted exclusively to the field of residential and commercial real estate finance. OMBA’s membership comprises mortgage originators and servicers, as well as investors, and a wide variety of mortgage industry-related firms. Mortgage banking firms engage directly in originating, selling, and servicing real estate investment portfolios.

Members of OMBA include mortgage bankers, mortgage brokers, banks, mortgage insurance companies, attorneys, credit unions, saving & loans associations etcetera.

OMBA is dedicated to the maintenance of a strong housing, residential and commercial, real estate finance system. This involves support for a strong economy; a public-private partnership for the production and maintenance of single and multi family home ownership opportunities; a strong secondary mortgage credit delivery system; equitable tax laws; suitable shelter for low income families and the disadvantaged; housing opportunities for the nation’s veterans; appropriate environmental measures; and fair and equitable bankruptcy laws.

OMBA consists of 145 member companies which represent approximately 80% of the mortgage lending business in the State of Ohio.

When borrowing money for a mortgage, homebuyers are primarily concerned with simply qualifying. Still, paying attention to the length of the loan is a borrowing tip that can save you a ton of money.

Home Loans

In the mortgage industry, the length of your loan used to be the only major issue you had to deal with. How times have changed! In the current market, the variety of loans that exist are simply stunning. Of course, the massive increase in loan options has inevitably led to massive confusion.

Borrowing Tip

Regardless of the type of loan you go with, you should always try to keep your loan term as short as possible. The shorter the loan period, the less you will pay in interest. Here an example using 15 and 30 year loans.

Assume our first homebuyer gets a $100,000 loan at 8 percent interest. He length of the loan is 30 years with a monthly payment of $733.76. For this mortgage, our homebuyer is going to pay $164,155.25 in interest over the life of the loan.

Now, take the same scenario, but reduce the term of the loan to 15 years. Our homebuyer is going to see the monthly payment bumped to $955.65 per month. Over the length of the loan, our homebuyer is going to pay $90,000 less in interest payments over the life of the loan. On top of this, the house will be paid off in half the time.

When borrowing money for a home purchase, you have to carefully budget your finances. If you can afford increased monthly payments, however, a shorter loan length is going to save you a lot of money over time.

In the recent weeks many people is refinancing with new adjustable rates mortgages that keep monthly payments low.
Faced with a sharp increase in the monthly payments and a need to take cash out of their homes, people is refinancing eralier this year to keep payments the same.

By the time the loan rate goes up, your income will have increased enough to cover the higher payments.
Typically set at artificially low rates in the first years of the loan, these mortgages are then reset at the prevailing interest rates.

For borrowers, the bet was that interest rates would remain low. Now the first big wave of the loan boom is cresting more than $300 billion worth of adjustable-rate mortgages, or about 5% of all outstanding mortgage debt.

For instance, a typical borrower with a $200,000 ARM could see his monthly payments increase neraly 25%, when the ARM adjusts from 4.5 percent to 6.5 percent. In total dollars, that is an increase from $ 1013 a month to $ 1254.
Instead of paying more now, many borrowers are refinancing into their second or third adjustable-rate mortgage.

So far, the number of borrowers refinancing this way is relatively small but mortgage industry official expect the numbers will surge next 2007. In doing so,these borrowers are pushing out any eventual shock of higher payments by another two or three years, if not longer.
For now this mini-debt consolidation boom is assuaging fears that rising interest rates and higher monthly payments would drive some borrowers into foreclosure or force them to scale back sharply on other spending.

This refinancing represents also a doubling down on a bet that housing prices will continue to rise; if the value of the home falls closer to the amount of the loan, that could affect the possibility of refinance, and may prompt the homeowner to either invest more the home or to sell it.

Adjustable loans come in many forms; most have low and fixed rates initially, many also let borrowers pay only interest portion of debt or even less than that. After the introductory period ends, lenders require bigger payments and can raise interest rates.

Debt Consolidation Loans

Wouldnt it be nice to make just one payment per month instead of several? Most of us not only have a mortgage payment. We have car payments, credit card payments, student loans, etc.

If you have been living in your home for a reasonable amount of time and you have acquired enough equity, you might want to consider a debt consolidation loan.

A debt consolidation loan is using the equity you have acquired in your home from monthly payments and appreciation to pay off all of your outstanding debt, leaving you with one monthly payment instead of several.

Consolidating your debt has the potential to save you a lot of cash on a monthly basis if you have accumulated a lot of debt.

The interest rates on credit cards alone are considerably higher than that which you would receive on a mortgage.

Another benefit is the interest you pay on your debt consolidation loan is tax deductible, unlike your other debt.

Consolidating your debt is a great way to save money, but dont just dive in. Take the time to educate yourself about the mortgage industry and definitely shop around for the best deal. The mortgage industry is very competitive, so let them compete for your business.

Another benefit to consolidating your debt is that it will help your credit score go up.

The accounts you have outstanding that you owe money to are called open trade lines, by paying these off and than closing a few of them to keep your debt under control, you will be effectively increasing your credit score over time, which is how lenders determine your payment history.

Jennifer Hershey has more than twenty years of experience in the Mortgage Industry as a loan officer. She is the owner of http://www.explainingmortgages.com/, a mortgage resource site devoted to making mortgage terms and products easy to understand.

Annual Percentage Rate (APR): Magical Number or Myth When Shopping For Mortgage Refinancing Or Second Mortgage Loans?

Analyzing APR during mortgage refinancing or second mortgage loan shopping can be a very tricky proposition. Many people have come to believe that a loans APR, or “Annual Percentage Rate”, is the single most important factor in comparing mortgage loans. However, this is rarely the case, especially in today’s marketplace, explains Bob Peckenpaugh, Manager of CFIC Home Mortgage.

Annual Percentage Rate is defined as “the cost of consumer credit as a percentage spread out over the term of the loan. Most consumers have no idea what makes up this elusive number. APR is a valuable tool in comparing various mortgage loan programs, but it should never be relied upon as the sole determining factor in choosing a loan, for the following reasons:

1) Not all closing costs are calculated within the APR uniformly. According to Peckenpaugh, There is a huge variance among lenders, mortgage loan officers, and even states on which fees they include in their APR when calculating the loan. There is no standard among the mortgage industry, let alone among competing mortgage companies.

2) The costs themselves can be manipulated within the loan. For example, prepaid interest (the amount of pro-rated interest a consumer pays at closing for interest which will be earned from that date until the end of the month) can be represented as anywhere from 1 to 30 days, a potentially huge difference, especially on larger mortgage refinancing loans.

3) Manipulation of the title fees. Ordinarily, the title company’s settlement, or closing fee is an APR fee, while their title insurance cost is not. Peckenpaugh explains, Recently, in order to minimize the effect to the APR, title companies began simply decreasing their closing fee, while subsequently increasing their title insurance fee by the same amount, thereby reducing the APR.

4) Lack of industry awareness of what is accurate. Most mortgage loan or refinancing officers do not intentionally try to mislead, but inaccurate information could result in the consumer making a poor decision.

As opposed to APR, consumers would be better served by asking the following simple questions.

1) What is the mortgage interest rate?
2) What is the total mortgage loan amount?
3) What is the monthly mortgage payment (principal and interest)?
4) How much are the closing costs?

Generally, a written estimate covering all of the above can be generated by the mortgage loan-refinancing officer and provided to you in the form of a “Good Faith Estimate” and/or a “Truth In Lending Statement”. Then, you can compare these documents between mortgage lenders in order to determine the authenticity and accuracy of your quotes. For further mortgage financing or refinancing information, contact Bob Peckenpaugh, Manager, CFIC Home Mortgage, at 1-800-943-9472.

A Change Is In The Market For Subprime Mortgage Loans

The subprime market is undergoing a major change due to the recent narrowing of lender guidelines regarding applicants. Why in particular is the subprime market being targeted? Perhaps this is because the subprime market tends to experience more problems with meeting their loan obligations than other markets.

Individuals who have to acquire a subprime loan typically have a spotty credit record, no credit record at all, or a bad credit record. No matter how you look at it, any lender who has the inclination to lend money to someone like that is taking a risk. Unfortunately, that risk is often realized in the form of defaults, bankruptcies, and foreclosures.

The narrowing of guidelines effectively narrows the pool of applicants. The guidelines are simply a set of rules that are used to determine who qualifies for a loan and who doesnt. Hence, if the guidelines become more restrictive, the risk is lessened for the lenders along with the size of the qualified applicant pool. In essence, the individuals who are the biggest risk will no longer be able to acquire a loan.

In effect, the true suppliers of the money that is provided for subprime loans are looking to decrease their risk regarding their mortgage portfolio while increasing their profit. If the guidelines arent changed swiftly enough, lenders who are caught in the crunch may have to close their doors. Fewer lenders means less competition and quite possibly less favorable terms for the borrowers.

Guidelines typically involve looking at the borrowers credit score, the amount of the down payment, the individuals track record for credit accounts, and work history. Up to now, these have all been flexible and rather tame. Times are changing though, and the mortgage industry is about to crack down on individuals who dont know how to manage their money.

An A paper loan is one that is given to a borrower who has the highest credit rating possible. It offers the most favorable terms including the lowest interest rates, the fewest points, and the least amount of other conditions attached to the loan. With the changes that are set to become standard at some lending agencies, A loans will be easier to acquire for some, and subprime loans are going to become more difficult to acquire.