Two Types of Lenders – One Showing Hardly any Foreclosures and Another Showing Many Foreclosures

There were two types to lenders whose quality of loans need to be analyzed. They advanced these loans to borrowers who were financially strained.

The first type of lender’s record show that out of every group of borrowers numbering five or six, one was defaulting; foreclosure rates were increasing. Among the second type of lender a maximum of one out of twenty borrowers were defaulting and thus foreclosure numbers were stable. From which group is borrowing desirable? It is undoubtedly – from the second type.

But this choice would pitch you against American capitalism’s flow. The lenders showing strong records are the housing enterprises that are non-profit. The wobbly numbers are from the sub-prime lenders to whom no borrower is too risky to be refused a loan.

Since the last many years investors have thrown in over $1 trillion for sub-prime lending. In comparison the non-profit housing sector got at the maximum only few billions. This explains why the dream of home ownership has become a nightmare for millions trapped in the bad loans.

Sub-prime loans are those carrying high rates of interest for non-prime or risky borrowers. Since they are risky the interest rates are high.

About ten years previously the lenders gave priority on number of mortgages contracted than on the quality of borrowers or the level of risks involved. To understand the logic one has to track the money to find out who is holding onto the bag of gains when the loans turn sour.

The agents, brokers, attorneys and first lenders in the mortgage world in the game of sub-prime loans receive exorbitant fees when they make contracts with borrowers. But the moment the loan is inked the first lenders sell off the loan to many other investors; mortgage backed securities are sold.

Does not the buyer of the mortgage backed security evaluate the amount of risk involved?  One or two decades previously they did do so; but that has become outdated. Previously the investors who bought the loans backed by residences expected initial lenders to give them verified facts about the income of the borrowers, the expenses, the debts as well as the assets. This was during the 80s and the 90s when the bankers or the first lenders were fully conversant with conventional lending. They went into the details about the borrowers, made inquires to back up the facts and looked deeply into the eyes of the borrower to assess their character before advancing loans. Old fashioned fogeys!