4. Types of Sub-Prime
Mortgage
• Adjustable Rate Mortgages - initial fixed
rate, then followed by variable interest
rates
• Interest only mortgages
• Minimum payment loans
• 80/20 Loans
• Stated Documentation
5. Sub-Prime Mortgage in U.S.
• 9% increase from 1996 through 2004
• 1/5 of the U.S. home loan market in 2006
6. Sub-Prime Mortgage History
• Depository Institutions Deregulation and
Monetary control act (DIDMCA) of 1980
– made it possible to charge higher interest
– made it legal to charge fees.
• In 1982 the Alternative Mortgage
Transaction Parity Act (AMTPA)
– permitted the use of variable interest rates
and balloon payments.
7. Sub-Prime Mortgage History Contd.
• Tax Reform Act (TRA) 1986
– allowed for the consumer to deduct interest
on mortgages for primary residences and one
additional home
– helped to make high mortgage rates cheaper
– allowed mortgage debt cheaper than
consumer debt.
8. Sub-Prime Mortgage History Contd.
• Mid 1990’s Sub-Prime mortgages, Sub-Prime
loans were originated mostly by non
depository and mono line finance companies
– not backed by banking institutions
– the future performance of the sub prime in the
long term was not know
9. Sub-Prime Mortgage History Contd.
• 1995 Sub-Prime Fixed Rate Mortgages were 62,000
– FRM originations peaking at almost 780,000
• Adjustable Rate Mortgages were 21,000
– ARM originations peaking over 866,000
• A housing bubble developed in the US during 2001-2006
– prices of homes increased and interest rates dropped
dramatically
– lowest level in 40 years
• Crisis ensued between 2006 and 2007
– lenders filed for bankruptcies
– accusations rose of actively encouraging fraudulent income
inflation on loan applications
11. Proponents of Sub-Prime
Lending
• Gives credit to the people who would
otherwise not have access to the credit
market.
• Many buyers would never have had the
opportunity to buy their own homes.
• These loans have contributed to the
current record home ownership numbers.
12. Sub-Prime Loans
• Sub-Prime loans can generate greater
profits for the lender/investors due to
there higher interest rates and fees
13. Criticisms of Sub-Prime
Lending
• “ Some lenders focused more on feeding the
marketplace than on the quality of loans, in part
because most of the risks that loans would go
bad were passed to investors. As a result,
mortgage applications with little documentation
were vulnerable to misrepresentation or
overestimation of repayment capacity by both
lenders and borrowers.”
---Ben Bernanke, Chief of Federal Reserve
15. Criticisms of sub-Prime
Lending Contd.
• Twelve years ago, Lehman Brothers Holdings
Inc. sent a vice president to California to check
out First Alliance Mortgage Co.
• Critics say Wall Street firms helped create the
mess by throwing so much money at the market
that lenders had a growing incentive to push
through insecure loans and mislead borrowers.
16. Criticisms of sub-Prime
Lending Contd.
• Nationally, the mortgage industry has
taken heat for its role in the sub-prime
mortgage crunch.
• Capital markets operate on the basic
premise of risk versus reward. The same
goes for loans.
17. Sub-Prime Blame
• Where Were the Realtors?
• What Role Should Realtors Have Played in
Warning About Risky Loans?
18. Sub-Prime Blame Contd.
• While much criticism has been leveled at sub-
prime lenders and mortgage brokers, there has
been little focus on the role of the realtors, even
though the agent often serves as the
homebuyer's chief advisor.
• Traditionally, agents are paid through a
commission which is paid by the seller of 5% or
6% of the home's sales price.
19. Ethical Issues of Sub-Prime
Lending
• 100% Financing
• Interest Only Loans
• Stated Income
• ARMs
• Commission Based Brokers
20. Ethical Issues of Sub-Prime
Lending Contd.
• Borrowers
• Appraisers
• FED
• Wall Street
• Rating Agencies
