Subprime is Gone, FHA, and Credit Unions

I work for a very small lender (credit union) at this time. We deal in only conventional financing with the two GSEs Fannie and Freddie. Anything else that we do that does not meet Fannie or Freddie guidelines are placed into our portfolio of loans. What does that mean to the average person? For one, it means that we have not done "subprime" loans. Every loan we do has the idea behind it...will the person be able to afford/pay us back.

Now before I worked at this credit union, I worked at Waterfield Mortgage, which was in turn bought by American Home Mortgage. Sound familiar? Yes, American Home Mortgage blew up just a couple months ago. I have a good idea what types of loans were being made in the market.

I have recently went to both the Indiana Mortgage Bankers Association annual meeting and the Northeast Indiana Mortgage Bankers associations meetings. What just stunned me in my tracks is how other lenders spoke about subprime lending. They talk about that it is gone. Just absolutely gone. Not that you can, "still do this or that," but just not available anymore. What a change in just a few months time!

Now all the lenders are trying to pile into FHA financing for their needs. Many lenders loving refer to FHA financing as "government subprime". It is somewhat true. Deliquency rates on FHA and subprime loans run about equal at just shy of 17%, but it is in the foreclosure rates where you see the big difference. FHA foreclosure is less than half that of subprime loans. Why is this?

For one, both FHA and subprime lending help those with less than perfect credit. FHA has no minimum credit score required. The difference really lies in the idea behind FHA. FHA is a "common sense" type of lending. The big question is, "Does it make sense?" and then document the snot out of it. Medical issues with documentation, interest rate increases (FHA Secure, even though many times you have to do a 203b instead) and any other documentable situation can be considered for FHA.

But make no mistake FHA is not subprime, nor will it ever be. FHA tracks lenders rigorously and make sure that they are making good loans comparable to other lenders in the same market. If a lender has a higher rate of foreclosures than the market, the lender comes under higher scrunity and possibly loss it's endorsement.

Subprime turned a blind eye to many issues. Self-employed? Do a stated income loan. How often did this happen? I skipped out on the last couple hours of the IMBA annual meeting because it was on "How to determine income from a tax return." No kidding. So many lenders got in the habit of placing individuals into loans of convenience such as subprime, stated income loans, no ratio, or no income no asset related loans that they had to spend time at the annual meeting either teaching those new to the industry to do it or remind the old timers how to do it again.

So what will happen to those who are facing rate resets, higher payments, and possible foreclosure to do? First, your their current lender and see what can be done. Ask to refinance. Ask to see if a loan modification is available (which will change the terms of your loan, such as taking an ARM and making it a fixed rate).

If these options are not available to you try refinancing with another lender. If you have a relationship with a credit union, it may be a good option when all else fails. Credit Unions value their members and if you have a long history with your credit union the more likely they are to make exceptions that other banks and lenders will not. If you're not part of a credit union, well frankly, you're probably paying too much for your banking services to begin with. Find one in your area. Most now have community charters that state if you live, work, worship, etc in their area, you can become a member. Not only will your banking services be cheaper. They can offer help to those who are loyal to them by being loyal to their members in times of need.