After reading bits and pieces of the Securities and Exchange Commission‘s complaint against the former heads of Fannie Mae and Freddie Mac one thought comes to mind: what exactly is a subprime loan again? The SEC accuses Dan Mudd, Richard Syron and others of underreporting the GSEs’ subprime exposure. In the Fannie suit, the SEC says that at Dec. 31, 2006 Fannie had subprime exposure through its “Expanded Approval” program of $43.3 billion, but in a public filing the GSE said that the exposure was just $4.8 billion. Could it be that Fannie felt that EA loans were not really subprime? In other words, understanding subprime is a matter of semantics. One man’s subprime is another’s prime. But as we all know it should boil down to FICO scores and debt-to-income ratios – shouldn’t it?
Paul, totally agree with you
Posted by Jorge Rawicz on December 21, 2011 at 12:27 PM EDT #
Yes that and verified income and assets
Posted by John K. on December 21, 2011 at 12:31 PM EDT #
understating of loan risk is one of the major factors that lead to artificial low rates. Proper risk exposure and disclosure by the GSE’s, sub prime lenders and rating agencies would have led to higher rates for the higher risk products. Higher rates would have caused both higher returns for higher risk AND lower consumer demand and fewer loans when consumers were faced with the true cost of the loans they were being offered.Intentional mistatement of risk is fraud and should be prosecuted. Correcting this issue is a better solution that creating onerous underwriting guidelines for good credit borrowers that makes home buying more difficult in our already depressed housing market.
Posted by Eric White on December 21, 2011 at 12:41 PM EDT #
No, Fico scores were the bigest cause the problem. Underwriting elements were overlooked, oversight compared to now was virtually non-existant, and this lazy way of allowing loans to be valued and purchased dawned the beginning of a crisis that will not be resolved in our life times.
Posted by Vince on December 21, 2011 at 12:46 PM EDT #
Nope. Both Prime and Subprime are defined by the exceptions made for previous payment habits.
Prime – no past dues in the previous 12 months, no unpaid collections, judgements or tax liens, no bankruptcies in previous 3 yrs, 2yr employment in same line of work, verified income and assets sufficient to support the requested transaction, and compliance with debt to income ratios. FICO score exceptions were and are made based upon the whole body of credit practices. Subprime – no outstanding liens, collections or judgements that affect title if not paid prior to closing. Sufficient income and assets to cover requested loan transaction, meet debt to income ratios, compliance with FICO score requirements. Review the whole body of previous credit use with credible explanations.
Posted by Skip Miller on December 21, 2011 at 01:01 PM EDT #
Those old EA products (I, II, and III)were for people that just missed the standard approve eligible per FNMA. They were also risk priced up in rate. I believe it’s unfair to completely categorize those programs as subprime because if you opened some of those old files, you would be baffled to see loans that looked like a prime loan all day long, but would come out as EA I or II and others that seemed destined for EA programs and ended up getting an automated approve eligible. And yes, we believe we were very accurate in our automated submissions since the tiniest of details could sometimes change the automated outcome.
Posted by Keith Lowry on December 21, 2011 at 01:04 PM EDT #
My take is even if the SEC is correct and subprime exposure was $43B and they all defaulted – it was still a very managable situation. Sub-Prime gets blamed for the housing crisis but clearly there were other culprits – like leverage ratios of 70 to 1.
Posted by Darin Chase on December 21, 2011 at 01:33 PM EDT #
Some REO/ BPO web sites are stating a BPO report is a mini Appraisal. If the reader of the BPO report assumes this is true would the BPO report be required to
comply to the FINANCIAL INSTITUTION REFORM,RECOVERY ENFORCEMENT ACT OF 1989?
Posted by Jack Schlenk on December 21, 2011 at 01:36 PM EDT #