Failure To Escrow SubPrime Another Nail In Borrowers Coffin
Ken Harney has to be my favorite real estate writer in the media. He is dead on this week with his column on the upside down nature of escrow in the lending arena.
According to some industry estimates, a majority of subprime mortgages closed during the housing boom years carried no escrows for property taxes and hazard insurance.
That is in stark contrast to the prime mortgage market for consumers with good credit, where mandatory escrow accounts are routine.
“It’s an upside-down world,” said Mike Calhoun, president and chief operating officer of the Center for Responsible Lending, a consumer advocacy group based in Durham, N.C.
“The people you’d think need an escrow the most aren’t required to have them, and the people who need them the least are forced to use them.” via the Baltimore Sun
Think about it for a second, how can you place the most onerous restrictions on borrowing on those who can (and plan on) afford the additional upfront costs, while letting those who are at the greatest risk have the most lenient terms.
Are you getting the feeling that the whole subprime market was created to fail for the borrowers?
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Comment by Austin Realtor's Wife on 30 March 2007:
You know what happened? The bar was lowered for lending- which for that time period worked. It was a risk, we took it and not all risks pan out to be successes.
I don’t know that it was designed for the borrower to fail (although it does smell funny), but when the bar is lowered, this tends to happen. Imagine if the bar was lowered on becoming a REALTOR, say continuing education wasn’t required. THEN where would we be? We’d have any BillyBob (no offense if BillyBob reads this!) rolling around in his truck spouting law from 1970 with no regard to modern practice.
Bottom line, raising the bar on lending will begin soon, and will unfortunately penalize buyers that really need that help. Stinks.
Comment by A Realty Group on 30 March 2007:
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1. Develop a family budget. Instead of budgeting what you’d like to spend, use receipts to create a budget for what you actually spent over the last six months. One advantage of this approach is that it factors in unexpected expenses such as car repairs, illnesses, etc., as well as predictable costs such as rent.
2. Reduce your debt. Generally speaking, lenders look for a total debt load of no more than 36 percent of income. Since this figure includes your mortgage, which typically ranges between 25 and 28 percent of income, you need to get the rest of installment debt—car loans, student loans, revolving balances on credit cards—down to a between 8 and 10 percent of your total income.
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Comment by Giorgio Campo on 31 March 2007:
So “right on” z-mo-nay. Could not have said it better; as a lender in Chicago, I have literally placed near 1000’s (8 or 900 hundred for sure) of below prime borrowers and probably 70% did not escrow- and no adjustments to rate either. On the flipside, in “prime” lending situations, most lenders will not allow you the “luxury” of waiving escrows (for free) if you don’t bring @least 20% hard, cold equity to the table.
Most of these sub-prime lenders are pretty much defunct these days and the remaining, well, they are on that slippery slope or learning how to cope.
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