Thought #13
March 2009
Author: Bill Thurston
Subprime Loans
There is a lot of information flying around about subprime loans and their
contribution to the present financial situation. Attached is the recently
published data on subprime loans
provided by the Federal Reserve. The "short" spreadsheet gives you the best
overall view.
Here are acronym definitions used in the spreadsheet:
FICO
is a credit bureau risk score. Scores
of 700 and higher means Excellent or Very Good credit.
Lenders
offer better rates and/or discounts if you are over 720.
Score
from 680 to 699 means Good and you can get a normal loan.
Score
from 620 to 679 is OK. You won't be denied but the terms are not going to be
great.
LTV stands for the combined Loan to Value and is the ratio of
the loan amount to the value of the property at origination.
Negative Amortization: If the current monthly payment for a loan
is not sufficient to cover the scheduled interest payment, unpaid interest is
added to the outstanding loan balance. Thus, for some loans, the outstanding
loan balance increases even as the monthly payments are made on a timely basis.
Loans with this feature are called negative amortization loans.
REOs per 1000 Housing Units means the number of real estate
owned properties per 1000 housing units. REO status indicates that the lender
has taken legal title to the property, through foreclosure or transference of
title from the borrower.
A couple of Thoughts about this information:
1. Over 90% of these loans are owner occupied. Speculators didn't do much here.
2. Only about 2 % of all loans are subprime.
3. The total of all subprime loans is about $490 billion. That is a over 2.5
million possible problem loans.
4. Over 11% are in foreclosure and over 30 % are delinquent.
5. About 40% of these loans are to people with credit scores under 600. Below
580 is considered awful!
One final thought that seems to revolves around this financial crisis:
If I hear one more of our elected official or there appointees saying "This
situation is very complex therefore what we are doing might not work." or " No
one knows but we will do ....", I think I will throw up. Can you imagine your
weather forecaster saying "No computer is large enough to accurately forecast
weather, so I might be wrong but I think it is going to be warm and windy
tomorrow". How about the auto industry, who we have given billions of dollars,
introducing their new models saying "No matter how good we are at marketing, it
is impossible to know if you are going to buy these cars and trucks but we sure
hope you do.". A couple is getting married and have changed their vows to the
following. "We really can't say "Till death do us part" because we really can't
know what is in our future so we will say "I will hope and try". Finally, we as
citizens have a responsibility to vote year after year. We can't possibly get
all the information on the candidates and we can't possibly know if the
candidates will implement their commitments to us during the campaigning. We
can't hedge our votes- we have to commit and be proven right or wrong in the
future. Our elected officials should act as we do even if proven wrong in the
future.
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