The Subprime Housing Market Pounds American Pocketbooks!

The subprime mortgage market has hurt the American economy. How often have you heard that statement lately? The fact of the matter is that it was abusive and predatory lending practices that got many unwary consumers in a bind, which in turn is harming the American economy. So is there actually some good that can come from subprime loans, and, if so, how can we differentiate harmful subprime loans from helpful ones?

First we need to see if there truly is such a thing as a "good" subprime loan. A subprime loan is simply a loan to someone who might not otherwise be able to obtain a mortgage, and therefore a home, and this loan will be offered at a higher rate than is normally offered in order to offset for the additional credit risk.

Sounds like good old capitalism at work, doesn't it? And if the issue were that simple then we could stand behind all subprime lending as a method for informed consumers to obtain a home. Even the National Association of Realtors has an article supporting subprime lending - as long as it is fair and informed.

And this of course is where the lines start to get blurred. Most people are familiar with balloon payments, and how those can shock the consumer. But because most people are aware of the dangers of balloon payments they are able to make an informed decision about whether or not they wish to enter into such an arrangement. But there are other lending practices that may cross over into predatory or abusive lending practices.

Prepayment penalties can be one way in which "good" subprime lending can cross over into a predatory practice. When a substantial penalty exists for loan prepayment, the borrower may find it impossible to refinance the loan and take advantage of a substantially changed marketplace only a few years after taking out the original loan. While technically "disclosed" in the contract, this information may not have been sufficiently disclosed to inform the borrower, and simply buried in the contract. Other practices, such as allowing the borrower to accept a payment as high as possible and failing to properly disclose the additional costs of taxes and insurance can further put borrowers into positions where they can no longer afford their homes.

Although there are scores of practices designed to allow subprime borrowers to obtain a home while making and securing money for the lending institution, and it is actually the manner in which these subprime loans are made and their proper or improper disclosure that pushes a "good loan" over into the "predatory practices arena," the two examples above serve us well in analyzing the situation.

FIRST - we have a buyer beware situation. Unfortunately in this caveat emptor environment it is simply too much to ask that the common borrower be up to speed and fully informed on all the practices that may jeopardize his home in the future. There must be some method in place to protect the borrower, as it is unreasonable to expect people who are untrained in mortgage lending practices to be sufficiently wary of all the methods that can easily become predatory in nature.

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