It hasn't been too long since the 'Mortgage Meltdown' when the 'Foreclosure Crisis' started, so you will remember Subprime Loans. Luckily, we learned our lesson as a society and mortgage companies are issuing these products anymore, right?
WRONG, they still exist we changed their name to FHA loans. Nearly 1/3 of loans today are FHA loans, the new subprime.
Let's remeber the definition of Sub Prime - It simple means that the borrower did not qualify for the best rates & programs available. It is often confused with meaning exotic loan programs like Option Arms and Interest Only but those were simply programs available under the Sub Prime category.
FHA has lower standards for approval than conventional loans. It is not credit score driven (really it is, but we pretend it isn't - long story), qualifying ratios are much easier to achieve and it requires a very low downpayment (sometimes $0 in association with other programs). These are the exact criteria that defined Sub Prime. I should note that the exotic variations do not exist so we are in a little better shape.
There is one drastic difference between Sub Prime and FHA: FHA is provided by our benevolent government while Sub Prime was concocted by the rich bankers. This is important to remember. This time, if we have another meltdown, there will be no question that the taxpayers are funding the bailout.
Do I have something against FHA? Of course not. I recommend it to my clients, am likely to use it for my next purchase and believe it is an excellent alternative for certain people (just like Option Arms were good for a very few select people). I just want everyone to be aware that just because the names change, the underlying reality continues to exist.
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I am not sure I would call FHA subprime. If the media would actually look up the history of FHA they would know why it even cam about. I won't get into the history of it you can go here to read about it.http://www.hud.gov/offices/hsg/fhahistory.cfm
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Now let's get into option arms. Were they a good product? In today's economy of course not. You have potential negative equity with declining values. Were they an ok loan during the good times? Well, when they were used properly. This loan product was good for special situations. When used properly they can pay a loan down faster than a conventional fixed rate. The problem arised when they got aggressive and started doing stated income and stated assets. For someone that is on commission or gets a large portion of income from bonuses, this is a great program. You make the small payment while waiting for the comission to come in then you can pay a large amount down when you get your bonus. Do you have to be disciplined? budgeted? YES! What happened, unscrupulous loan officers were using this loan to make rediculous incomes at the expense of a borrower that had no idea what they were getting into. I can't tell you how many borrowers that I have talked to that are trying to get out of this loan that should have never been in it. The sweet smell of a ridiculous low "introductory" payment was too good to be true and the unscrupulous loan officer didn't tell them that it wouldn't last and they would owe more in the end if they just made the minimum payment. Some say, well the borrower still signed the papers even though they didn't know. It is a fidicuary responsibility of the loan officer to consult the borrower to help them reach their finaincal goals and fill a finanical need. PERIOD! I could go on but I will stop here.