Graduate Program

This drew many lenders to lower-income borrowers. Later, in 1986, the federal government began allowing taxpayers to deduct the interest paid on mortgage loans. This led directly to a steady increase in home ownership, in many cases regardless of how the borrowers would afford the loans in the future. The focus in that time shifted from investment in regular “prime” mortgages, to the riskier “subprime” loans. The risk of default on subprime loans was higher than that of prime loans, but they were still more attractive to investors. The volatility in the subprime market was very low in comparison to the stock market. By the time housing prices peaked (from 2004 to 2006), over a quarter of all loans made were high-rate subprime loans. This ballooned into $332 billion in loans in 2006. This aggressive lending and concurrent demand for homeownership resulted in many borrowers enjoying houses they could never afford.

SUBPRIME LENDING: A SHEEP IN WOLF’S CLOTHING?

Key to the understanding of the current issues facing the mortgage lending industry is the distinction between “subprime” lending and the oft-unmentioned “predatory” lending. A subprime loan, also known as a “second chance” loan, is tailored to borrowers with “less than perfect credit,” credit problems, or who are less likely to qualify for conventional home loans. Many times, it is the only option for home ownership that the borrowers have. The loans come with higher interest rates and fees, which is standard for any line of credit approved for higher-risk borrowers.

Predatory lending involves engaging deception or even fraud, through misinforming and manipulating the borrower. Predatory lenders use abusive loan practices that generally involve one or more of the following problems:

loans structured to result in seriously disproportionate net harm to borrowers,

fraud or deceptive practices in lending,

loans that require borrowers to waive meaningful legal redress.

The Coalition for Responsible Lending recently estimated that predatory lending alone costs borrowers in the U.S. over $9 billion every year. While interest rates were dropping from 1990 to 1998, the home foreclosure rate increased massively – rising 384%.

While subprime lending creates homeowners, predatory lending eliminates them. Predatory lending is most prevalent in the subprime market, but occurs across the entire lending spectrum. At the zenith of the subprime lending market, a low credit score, insufficient monthly income, and even a history of bankruptcies could not keep borrowers from obtaining mortgages. The two brokers, Aaron Thompson and Randy Carretta, operated People’s Home Mortgage. While the stated purpose of the business was to “assist borrowers in obtaining financing to purchase homes,” the duo instead submitted for borrowers applications containing patent misrepresentations about the borrower’s financial condition. The stated purpose of the Act is to “reform consumer mortgage practices and provide accountability for such practices, to establish licensing and registration requirements for residential mortgage originators, to provide certain standards for consumer mortgage loans, and for other purposes.” If a mortgage lender does not comply with the “reasonable and good faith determination” standard in deciding to lend a borrower money, and the borrower is unable to repay, the borrower could file a civil action against the lender pursuant to Section 204 of the Act. Potential Borrower applies for a mortgage loan.

Mortgage Lender, based upon information provided by Potential Borrower, agrees to lend the money based on terms both parties agree to.

Borrower files a civil action against Lender to nullify the loan, recoup costs incurred in filing the lawsuit, and to recoup attorney’s fees.

The basic effect of these provisions would allow borrowers to sue lenders simply because the lenders should not have loaned them money. The potential effect of such legislation would be to curtail lending to a point where mortgage lenders would avoid making loans to all but the highest order of borrowers. The purpose of the SAFE Act is to help families and neighborhoods facing home foreclosure and address the subprime mortgage crisis. The plan is to provide over $10 billion to refinance subprime mortgages which are stressed or facing foreclosure. The disclosure requirements, however, would place a strong burden on mortgage lenders to inform potential borrowers about nearly every financial aspect of buying a house.

The proposed borrower education and increased disclosure requirements would not end after purchase. The new credit rating system would take into account information such as rent payment, utility payment, and insurance payment histories. One could easily argue that rent and utility payment information would be far more useful to mortgage lenders than normal credit rating information.

In 2007, the Bush administration loosened some lending rules, which could help around 80,000 borrowers refinance to avoid higher rates. The bill would, among other things, expand the Homeownership and Equity Protection Act (HOEPA) to cover more loans, expand the protection for HOEPA loans, clarify state law regarding mortgage loan broker duties to emphasize the fiduciary duties owed to borrowers, and create a new section of protections for subprime loans.

The result of the confusion between subprime and predatory lenders is clear: subprime loans are utterly feared and avoided by all borrowers, many of whom would greatly benefit from such a situation. Potential borrowers have decided to stay put after hearing about the foreclosures, dreaded adjustable rates, and others losing their homes. In Philadelphia County, a startling forty-six percent of all mortgage loans were subprime.

Graduate students many times face student loans around $100,000, and mounting credit card debt from extraneous expenses incurred during school. Simply making student loan payments on time, however, will boost your chances of getting a better interest rate on a home loan. The Federal Housing Administration (FHA) insures specialized first-time homebuyer loans, which greatly encourage new homeownership. These loans are funded by lending institutions and insured by the U.S. Department of Housing and Urban Development. For those looking for a single-family home here in Allegheny County, the current lending limit is $327,500. As mortgage rates rose, the demand in housing decreased. The Federal Reserve has lowered interest rates twice to encourage both home retention and home purchasing. Many other types of consumer loans – even everyday financing options – will be affected, because they were packaged and sold in the same manner as mortgage loans.

Understanding Subprime Lending And Its Implications To The Current Graduate Student

Many graduates apply for post-graduate study.