Not All Borrowers Ready for Prime Time

Not every would-be homebuyer has good credit. But many of them still get a mortgage loan; they just pay more for it. Unfortunately, the growth in lending to credit-impaired (sub-prime) borrowers has given rise to two mortgage processes in America.

The prime process leaves borrowers with stronger credit histories feeling more confident and satisfied than ever. The sub-prime process leaves families with credit problems feeling less confident and generally dissatisfied about mortgage lending.

“Clearly the housing finance system is working extremely well for millions of Americans, but . . . not for every American,” said Fannie Mae Chairman and CEO Franklin D. Raines, commenting on results of the 2001 Fannie Mae National Housing Survey. “The results raise several issues for the entire mortgage industry to address, and the central question is whether all consumers are enjoying their basic right to the lowest-cost mortgage for which they can qualify.”

The tenth annual Fannie Mae survey found that more homeowners believe now is a very good time to buy than did so last year — 27 percent compared with 19 percent.

Homeowners don’t seem concerned with the recent spate of bad news about layoffs, corporate earnings warnings and a falling stock market. In fact, the percentage of Americans who see obstacles such as lacking money for a down payment, job insecurity and finding a house they could actually afford declined or remained the same from last year.

The 2001 survey, however, does reveal a wide difference between the credit “haves and have-nots.” The survey defined a credit-impaired borrower as one who made a mortgage payment 60 days or more late, declared bankruptcy or faced foreclosure in the last three years.

Homeowners are split on the question of whether lenders take advantage of credit-impaired borrowers; 49 percent of sub-prime borrowers said lenders help “people like them.” That includes nearly half the credit-impaired borrowers paying more than 10.5 percent interest.

Sub-prime borrowers ultimately choose a lender because they believe they have few options, not because of the lender’s reputation or because they believe the lender is offering them a “good deal” on a loan. Less than half (43 percent) of credit-impaired borrowers said their lender had one of the best or even a solid reputation. Only 11 percent of sub-prime borrowers said their mortgage lender offered the best interest rate for which they qualified, a third of the percentage of all homeowners who said so.

The reason credit-impaired borrowers choose the lender they do that distinguishes them from all homebuyers. Sub-prime lenders pick the lender they do because they believe the lender approved most loans. Fifteen percent of sub-prime borrowers cited this reason while only 4 percent of all homeowners held that opinion of their lender.

It should come as no surprise, therefore, that many credit-impaired borrowers report general dissatisfaction with the mortgage process. Of the 45 percent of sub-prime borrowers who said their mortgage interest rate exceeded 10.5 percent, 81 percent said they were dissatisfied with their loan rate.

Among all sub-prime borrowers, 58 percent said the lender controlled the mortgage process. This compared with 46 percent of all homebuyers who said they — not the lender — were in control. Only 44 percent of credit-impaired homeowners said they would be “very or fairly likely” to return to the same lender if they needed another mortgage loan. This compared with 63 percent of all homebuyers who are likely to be repeat customers of their current lender.

Sixty-three percent of credit-impaired borrowers said finding a mortgage lender they can trust would be an obstacle if they wanted to buy a home today. Only 34 percent of this group say they are confident they got the “best mortgage deal possible.” Sixty-eight percent of all homebuyers said they believe they got the best deal they could.

Twenty-nine percent of credit-impaired borrowers said they tried to shop for the lowest cost mortgage, but now have doubts about whether they actually succeeded.

If most credit-impaired borrowers feel they paid too much, they have company in the U.S. Senate. Sen. Charles Schumer (D-NY) and Sen. Wayne Allard (R-Colo.) have resurrected their proposed Consumer Credit Score Disclosure Act, which never made it out of the Senate Banking Committee last year. The bill would oblige mortgage lenders and credit reporting agencies to inform borrowers of credit scores, how scores were calculated and what the scores mean.

Schumer says sub-prime consumers in particular need this information. He points to Freddie Mac data showing Americans overspend some $100 million annually on home loans because an estimated 379,000 sub-prime borrowers actually have credit scores that qualify them for less expensive, prime-rate financing.

The Fannie Mae survey also reveals that credit-impaired borrowers are more likely to have mortgages with prepayment penalties or pay more than 10.5 percent interest. Many have a balloon loan, in which the entire unpaid balance becomes due after five to ten years.

Other problems faced by sub-prime borrowers include interest rates that escalate, lack of general knowledge regarding the home-buying process and a nagging doubt as to whether they will ever own the home outright.

For the first time ever, the majority of homebuyers told Fannie Mae they controlled the mortgage application process. Apparently other barriers to homeownership are falling as well. Fewer renters view up-front costs as a formidable obstacle. Less than 40 percent see the down payment or closing costs as obstacles.

Today’s homebuyer is better informed than those of 1994. Nearly 50 percent of survey respondents felt uncertain about how to start the home-buying process back then; today, less than 33 percent have that concern. Almost 60 percent say they feel “comfortable” with the terminology and process of home buying. And about 75 percent of Americans are aware of their credit standing.

But as long as there are families with credit problems, not everyone is going to be happy about their mortgage or lack thereof.

Real Estate Center Online News, August 2001.

Copyright© 2002, David S. Jones
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