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Prime Mortgage vs. Subprime Mortgage

The definition of a “subprime mortgage–

A type of mortgage that is normally made out to borrowers with lower credit ratings. As a result of the borrower’s lowered credit rating, a conventional mortgage is not offered because the lender views the borrower as having a larger-than-average risk of defaulting on the loan. Lending institutions often charge interest on subprime mortgages at a rate that is higher than a conventional mortgage in order to compensate themselves for carrying more risk.

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Subprime Mortgages – Axsmith Law Blog

From ProPublica: ”  Every step of the way, from her first subprime loan to foreclosure, her downfall was abetted by a mortgage industry so profit-driven and disconnected from homeowners that the common interests once linking lender and borrower have been severed. The lending arms of the nation’s largest financial institutions helped plunge the country into crisis through their abuses and blunders, and they responded to that crisis with still more abuses and blunders — this time in how they handled people facing foreclosure. For subprime borrowers like Ramos, it has been as hard to work their way out of trouble as it was easy for them to get the loans that started their downfall. The millions of prime borrowers who thought they were doing everything right, only to be caught in a historic wave of unemployment, have been forced to endure a similar gauntlet of delays, errors and traps.  The definitions differ, but so slightly.”

Prime Loan vs. Subprime Loan from Finance Company Chart

Finance companies often specialize in offering subprime loans – loans to people with poor credit. Subprime loans come with higher annual percentage rates than prime loans. If you can only get a subprime loan through a finance company, it may be preferable to work on improving your credit score first and hold off on getting a new car until you can get a loan with a better APR. This example shows the difference between a loan at 5% APR (a good rate) and one at 15% APR (a rate often offered by finance companies):

The story never seems to change–elderly or hardworking people who are pulled into the subprime boondoggle

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Subprime Loans – Axsmith Law Blog

axsmith-law-subprime-mortgage-loans-dc-philly

Subprime Mortgage Loans – Axsmith Law Blog

A new study by a pair of researchers at the University of Pennsylvania’s Wharton School of Business casts serious doubt on the rest of this narrative, popular as it is. Subprime borrowers were more likely to default, especially in the earlier years of the crisis, but over time twice as many prime borrowers lost their homes as subprime, with correspondingly higher total dollar impact on the financial markets. And the key variable driving all foreclosures wasn’t the type of loan, the amount of leverage, or the socioeconomic or ethnic status of the borrower, but whether a given house was underwater, or worth less than its mortgage.

In 2009, the Mortgage Bankers Association had this to say:

While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans. The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts. A year ago they accounted for one in five.

And the FBI is investigating both subprime and prime mortgage loans, it seems–

Subprime mortgage loans under FBI investigation:

  • We’re 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. We’re also looking at insider trading by some executives.

Traditional mortgage fraud under FBI investigation:

  • We have 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, we’re 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 Marketing—along with a bank officer, a closing agent, and others—pled guilty to a $100 million mortgage scheme involving some 200 homes.

Right now, we’re seeing no links to organized crime syndicates, street gangs, or terrorist groups in our cases.

 

 

 

 

 

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