Oct 22, 2010 Joe Dejoseph
In any company, an aggressive business strategy can generate an uptick in revenue, but at what cost? In the finance industry, aggressive subprime lending came at the cost of the now failed housing market. You may be surprised to know (or maybe not) that many borrowers whose credit scores qualified them for more conventional loans were pushed into risky subprime loans. So, the price to the consumer was a more expensive loan. These consumers say that lenders or brokers aggressively marketed the subprime loans, offering easier and faster approvals.
Lenders have a compensation structure that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower may have qualified for. But the lenders’ or brokers’ game is not fair because they are often hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms. So, consumers with bad credit scores and also many consumers with seemingly good credit were caught in the subprime trap.
According to the analysis made by American Loan Performance, a San Francisco based research firm, 41% of the subprime mortgages sold in 2004 went to borrowers who qualified for prime-rate loans. The Wall Street Journal stated that in 2005, 55% of subprime borrowers were sold subprime when they qualified for prime. And in 2006 61% of the subprime mortgages issued went to borrowers who qualified for prime rate mortgages.
Many times, such loans involved fraud. This is what many borrowers experienced when they wound up with the loans with high interest rates despite good credit scores. Because they had a decent credit score, their lenders told them they would do a 100% no documentation loan. This in turn opened the door for many mortgage brokers to do whatever they wanted to do. And unfortunately badly informed and unsophisticated borrowers who had good credit were duped into loans they had no hope of repaying.