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Oh My, It’s The Borrower’s Fault

by Peter G. Miller
January 4th, 2008

Jen Jones offers a view which should be discussed. She says:

“Mr. Miller, so many of these homeowners in trouble bought their homes with 0 down and refinanced over and over cashing out all of their equity year after year. Will they be eligible for the FHA Secure program or any other bail-out assistance? Unfortunately this scenario applies to such a huge number of these people in trouble. If you purchased your home 10 years ago for $80k and you now owe $300k it’s important to note that you made a profit of approximately $220k that you spent the way you saw fit. I don’t think you can be considered a “victim” of the subprime lending industry. Sub-prime lenders made a lot of money, true……but so did the borrowers who cashed out over and over and over.

“It’s also important to note that every one of these borrowers did, in fact have a choice of an adjustable or a fixed rate loan. The difference was the rate and how much house they could “afford”. 5.5% was the adjustable or 7.25% fixed. The majority of these borrowers wanted a conforming rate even though they were non-conforming borrowers. The got that rate but had to sacrifice their better judgement to get it.”

I have a different view. Let’s go to the video (or whatever it is that people do on blogs…).

First, it is true that people bought at $80,000 a decade ago and refinanced as home values rose. This is what people with rising asset values do. The vast majority of the people who refinanced did so not only to raise cash but to take advantage of lower interest rates. Thus, for example, I refinanced, took out cash, but my monthly payments declined because rates fell.

Second, some number of borrowers will always be foreclosed. The question we now have is why have the numbers gone up so suddenly? Since the government says the economy is strong and employment levels are high, it must be something else. I say that “something” else is the toxic loan. If I’m wrong, how come lenders are now running from such products?

Third, loan officers do NOT work for borrowers. Under federal rules there is no fiduciary obligation to do what’s best for the borrower. In the scenario where a borrower has a choice between a 5.5% adjustable or a 7.25% fixed, you have to wonder why the lender ever offered such an option since the inevitable result was preordained. Could the ARM have resulted in more fees than the fixed-rate product? Lenders could have declined loans to people who were willing to sacrifice their better judgment — indeed, the willingness to sacrifice better judgment should be seen as a reason to deny a loan….

The point not addressed here is this: How many borrowers who qualified for FHA mortgages were sold subprime loans? And I do mean “sold.”

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This entry was posted on Friday, January 4th, 2008 at 1:43 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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