The Subprime Debacle - The Greed At the Core of It All

Last week, I attended the Congressional Black Caucus in Washington, DC. The caucus is an opportunity for the government, business leaders, and citizens to discuss the state of Black America and brainstorm solutions and next steps. Of course, foreclosure and the current economic crisis were a huge topic of discussion.

At a foreclosure forum attended by hundreds, several industry leaders and government officials debated the origins of the crisis and provided insight on how to move through. One of the most interesting points that I heard, however, was something that I think all of America needs to understand and absorb.

25-50% of people who received sub-prime loans could have qualified for prime loans.

That is a HUGE revelation.

I was being interviewed by a radio host yesterday who, when I repeated that fact, asked me to further explain. I explained that, in short, a sub-prime mortgage costs more than a prime mortgage. A sub-prime mortgage was created for individuals who could not qualify (through credit score, income level, debt-to-income ratio, etc.) for a prime loan, therefore there are increased percentages, fees, and repercussions for non-payment or pre-payment. For example, a $200,000 loan may cost a prime customer 6%, while a sub-prime customer may have to pay 9%, plus 5 points at the loan closing, AND carry a pre-payment penalty, which means that more money is due if a person decides to refinance to a better rate.

Basically, a sub-prime loan provides MORE PROFIT for a lender and mortgage broker. What the fact above shows is that people who could have qualified for a prime loan were steered in the direction of a product that provided more cash for a lender and mortgage broker, but cost the homeowner more money.

That is greed, plain and simple.

For people who blame the sub-prime homeowner for the current economic state, remember the above fact.