Thanks to a plethora of mortgage options available today to young home buyers, almost anyone can qualify for a home loan. But new buyers must be careful when delving into the world of subprime lending because the American dream can quickly become an American nightmare. In the past only those with a stellar credit score were able to attain a home, but with the recent boom in the subprime lending market all that has changed. Insiders in the real estate industry offer contrasting opinions about the positive and negative impact of subprime lending and its danger to young graduates. A subprime lending company offers financing to those with a few ‘dings’ in their credit history, but at an interest rate that is often higher and with terms less favorable than those offered by a mainstream lender. “The most important thing is to get in the game,” said RE/MAX realtor Tom Shelby. He said the sooner a person can start building equity and stop renting the better. “You’re building your own equity rather than that of your landlord,” he said. Shelby suggests that students or graduates purchase a home early, even if they must take a subprime rate. Once a person has taken steps that will increase their eligibility for a prime rate loan, such as building their credit score or establishing a higher set income, they should refinance at a better rate. “Make sure you know what you’re getting into. Be wary of low introductory adjustable rate mortgages that can be adjusted out of the ballpark,” Shelby said. An adjustable rate mortgage, or ARM, is a mortgage in which the rate starts out low for the first two or three years and then “adjusts” to a new rate, which is almost always higher, he said. Manny Uceda, mortgage banker for Premier Nationwide Lending, offers a different opinion to students and graduates considering a home purchase. Just because someone can purchase a home doesn’t always mean that they should, Uceda said. He said sometimes it is better for a buyer to wait until he or she is in a financial position that allows them to qualify for a traditional mortgage before buying their first home because taking a subprime loan with plans to refinance is not always a safe bet. “You can’t predict what the market is going to do in two or three years,” he said, “and the value of a home can actually go below what you could refinance for. You don’t want to be stuck in a property you’re going to regret later.” Subprime lenders often target low-income areas or people already deeply embedded in debt. The lenders also offer second mortgages that put a cash amount equal to the value of a borrower’s home in their hands to pay off other debt. When the borrower is unable to pay the rate, they not only fall farther into debt, but also lose their home. A study conducted by the Center for Responsible Lending estimated that nationwide, over 2.2 million Americans who obtained their homes through subprime loans will lose or have already lost their home to foreclosure. The report concluded the amount of homes lost due to first and second mortgages through subprime lenders actually resulted in a net loss of home ownership overall. According to the online foreclosure database RealtyTrac, Louisiana ranked 43rd with 158 foreclosures this past month. Darin Domingue, deputy chief examiner for the Louisiana Office of Financial Institutions, said this number is drastically inflated in Louisiana due to hurricanes Katrina and Rita. “A lot of people are delinquent because of the hurricane. It’s the reason why our delinquencies are as high as they are,” he said. According to Domingue, between 13 and 15 percent of outstanding mortgages in Louisiana are subprime and about 7 percent are nontraditional. Nontraditional mortgages include the ARM. But all subprime loans are not essentially bad, Domingue said. “Innovations in mortgage finance have resulted in the highest level of homeownership in history,” he said. “The problem is not the products, it’s people being put in the wrong products.” Domingue said many subprime lenders offer loans without consideration of the borrower’s ability to repay that loan. “Make sure you have the financial capacity to pay the monthly rates once the teaser rate ends,” he said. The “teaser” is the rate you pay in the first two or three years of the ARM. When the initial period ends, the borrower suffers what Domingue calls “payment shock,” where the loan resets to a higher rate that they may not be able to afford. Uceda agreed with Domingue’s statement. “A lot of lenders don’t educate you because their job is to make money,” Uceda said. “I’d rather sleep at night.”
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