Prime or not Prime, that is the big mortgage question.

I was doing my daily routine today, which usually starts off with a look at the morning market on Bloomberg, and then progresses to reading cnnmoney.com. One of the first articles I saw was Wow, I could've had a prime mortgage.

It discusses the fact that 15-35% of all people in subprime loans were given to people that could have qualified for prime loans. I knew this was an issue, but not to this extent. Towards the end of 2006 and start of 2007, I had 4, yes 4, clients that I was refinancing, and all 4 of them were perfect scenarios. Perfect credit, great income, easy deals. Every single one of them had prepayment penalties, when they were told that they didn't. There is no reason, at any Loan to Value (the amount borrowered, compared to value of the property), that they should ever have a prepayment penalty. Never. We have put people with foreclosures on the report, horrible credit, but with a really low Loan to Value, into Fannie Mae loans. This business is flooded with people that don't know what they are doing. I am not saying I have the answer all of the time, but I am confident that 95% of the time, I have done my due diligence on every persons situation, and have put together the best possible situation, with options for costs, to make sure the clients knows the options.
I am not joking whatsoever, this is hurting the business.
This is the first sign that you are in a "subprime" loan. A prepayment penalty is the first evidence. There are a few reasons that a lender or broker would put someone of this caliber into a subprime loan.
First, they are lazy. Often times they believe that subprime loans are easy to satisfy conditions, and overall much easier to get done. The reality is, that with Fannie Mae, documentation can be easier with a prime loan. The difference, is the underwriting process with a prime loan may take a little longer. Is it worth slapping a potential lifetime client with a prepayment penalty of 6 months interest, to save yourself 1 week for underwriting.
Apparantly so, 15-35% is a staggering number.
Second, They don't have any other options. One of the biggest subprime lenders of the early 2000's and even more recently, was Ameriquest. The reason I have some of the inside scoop is because my boss was an employee years back, and knew the ins and out of their operation. I have no issue with Ameriquest, though they have been killed in the media, but the reality is, as an employee of Ameriquest, you are able to sell Ameriquest product and that is it! They only offer high cost, high rate loans, because that is what Ameriquest needed to make a profit. It costs a lot to sponsor Major League Baseball, doesn't it? This speaks volumes for their training and salesmanship, to take a prime borrower and sell them something horrible. But, this is what has killed part of the market, putting good loans, into bad products.
Thirdly, Lenders believe that they can make more money on subprime loans. From my knowledge, maybe I am wrong, isn't it illegal to charge X person more than Y, just because they have different credit. I am not sure the regulation, but I am pretty sure that you have to give everyone the same deal, whatever you feel that should be. Help me out there, I can't find the law on it!?!?!?!?
So wouldn't it be illegal to make more from a subprime borrower? The only difference should be the fact that the rate will be higher, there is a prepayment penalty, and the margin and adjustment schedule for when it goes adjustable is different, on a sub-prime loan. Cost should be off the table, right?
The point of my writing is again to do your research as a consumer. People, though your loan officer may seem honest and can do a good job, aren't always what they seem. Ask you co-workers for advice, research on the internet (as you are doing right now!), and make sure that you are confident in what you are getting.
Knowledge is power in any business, but especially the mortgage business.
Jon Vetter
San Francisco Loan Officer, for your San Francisco Home Loan