Updated: May 3, 2013 12:14PM
It's the loans that are subprime -- not the borrowers! Let's stop blaming the people who took the bait (and switch), and thought they'd landed their piece of the American Dream. Home ownership has been a goal of most Americans, or those who landed on our shores as immigrants.
The offer to make that dream affordable was irresistible.
Essentially, that's what happened to millions of families who make up a significant portion of the $1.3 billion subprime mortgages outstanding today. Who's to blame?
Sure, some of those loans were taken out by scam artists who had no intention of owning the homes for long. Others figured on "flipping" the property at a higher price to the next dreamer.
But when the dust settles and all the blame is cast, it's very likely that the real losers will be the families who were attracted by ads run in newspapers and on local radio by mortgage brokers who promised low monthly payments, no money down and a chance to buy the dream house financed only by dreams.
Fully 52 percent of subprime loans were originated by non-regulated mortgage brokers, who fall through the cracks between federal and state regulation.
As "originators," they presented the contracts, which were then "underwritten" by small mortgage companies. Little or no documentation was required, either to verify borrowers' incomes or to substantiate the purchase price. The individual "mortgage brokers" received a cash fee for every loan they originated.
The greed moved quickly upstream, as the mortgages were "securitized," or packaged for resale to larger institutions that would ultimately either keep or sell the "servicing" process, the collection of monthly payments on those loans, which earned significant fees.
Then the future income from payments on these loans was packaged and sold to investors, who were eager to get higher interest rates than those available on Treasury securities.
The greed spread. The investors knew that these were adjustable-rate mortgages, and would bring an ever-increasing monthly income to them. The investors never met the borrowers -- individuals from small towns and large cities, who were told they could now make affordable payments to own their home.
Very few homeowners read the fine print. Fewer still understood that adjustable rates meant rising rates, which meant higher monthly payments. In fact, for many homeowners, the monthly payment doubled -- either as a result of unrealistically low "teaser" rates, or as the Fed raised interest rates.
Financial institutions seek to avoid the expense of foreclosure and adding another mortgage default on their books. They're willing to work with you if you don't wait too long. Here's what to do now.
**If you have an adjustable-rate mortgage, good credit and enough equity in your home, refinance to a fixed-rate mortgage.
**If you're lacking either creditworthiness or equity in your home, contact your lender. Ask to work out a lower monthly payment, fixed at the original rate, before you become a statistic.
**If you've moved past the early stages, or if your lender won't negotiate, contact local community groups that work on housing issues. To find the nearest office of Neighborhood Housing Services, the national, non-profit housing advocates, go to www.nhsofamerica.org.
In Chicago, contact Neighborhood Housing Services at (773) 329-4010. You aren't alone
You're not alone in your problem. A lot of people have a lot to lose -- whether they're financial institutions, investors, builders or workers in the housing industry who don't want to see a flood of homes for sale, or simply your neighbors.
That's why there's a good chance that you won't have to take the blame, or lose your home -- if you act quickly. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business. Distributed by Creators Syndicate.
THE SAVAGE TRUTH