Subprime

More than half of foreclosed loans are the result of subprime and predatory lending. A subprime borrower is one with bad credit. Each lender has its own definition of what constitutes a subprime borrower, but typically a FICA credit score of less than 620 places you in that category.

Many lenders specialize in subprime loans and are eager to loan money to those with bad credit. Higher risks bring higher rewards. Loans to subprime lenders command higher interest rates.

The argument in favor of subprime loans is these loans enable a segment of the populations to buy homes that would otherwise be unaffordable.

Unfortunately, because of low teaser payments, subprime loans enable subprime borrowers to buy homes that are actually unaffordable.

There is no point in enabling someone to buy a house only to take it away a few years later.

Federal law should outlaw loans that are made only on the basis of stated income. Loans should be made only to those home buyers who demonstrate an ability to repay. The ability to repay should be for the expected payments over the life of the loan and not simply the payment at the low teaser interest rate offered initially.

The federal government can ban unfair and deceptive real estate lending. It can forbid harmful loan practices and provisions such as excessive prepayment penalties. I should require disclosure of expected payments over the life of the loan.