Is Sub-Prime Lending Dead?

No it isn't. It is, however, in serious condition. To make it worse it is unstable. Any hope for life-support is essentially non-existent and chances of non-conforming (you call it sub-prime) lending ever soaring above the rest, including FHA home mortgages, is equally so.

The truth is most sub-prime lending needed to go. It was dangerous--even reckless--to the borrower, the lender and the housing economy. When I heard of lenders offering real estate investment (non-owner occupied) loans to borrower with a 620 middle score, no verification of income, no verification of assets and no money down PLUS allowing the seller to contribute 3% to closing costs I knew we were in trouble. While speaking to a national vice-president of that company I asked him point blank, "what are you doing, laundering drug money?"

It was a serious question. His answer? "I don't know and I don't care."

Over the past three years or so I must have said it a hundred times and published it dozens of times: many of these borrowers do not deserve these loans. Someone who has missed payments, has collections on their credit, has had a foreclosure or repossession is a very high credit risk.

At first making non-conforming loans available to these people made a little sense because guidelines were still strict enough just to expand to people who had made payments, could show income and assets, had job stability, and had demonstrated fair risk but maybe had been through a short period of trouble. Then it degenerated quickly.

Adding W2'd employees to the list of people who could state their income in order to get a loan was a bad idea. Of course the Fed's current proposal to completely eliminated stated income, regardless of assets and credit, is far worse--more on that in a separate blog.

The bottom line is, for all major intents and purposes, sub-prime is off the table. Yes, it is still around and still available. No, it probably can't help you if you are upside down, decreasing in income, unstable in employment, or many other scenarios which may preclude you from borrowing at all.

The best remaining solution in many cases is either an FHA Home Loan or an FHA Secure Refinance if you are looking to refinance. The problem, of course, is the limit of FHA secured home loans to far less than the limit of conforming. There is about a $200,000 gap in most areas. So if FHA intends to replace sub-prime the loan limit, if nothing else, needs to be raised to the level of conforming (Fannie Mae, Freddie Mac, etc.) limits.

Copyright(c)2007 Ken Cook. Ken is a real estate investor, trainer, speaker, author and prolific real estate blogger. He is also Director of Operations at Novation Mortgage licensed to provide real estate loans in Georgia and Florida and small commercial loans nationwide.