‘Sub-prime’ cuts a wide swath

WASHINGTON -- In today’s mortgage market, the term “sub-prime” has become something of a four-letter word, with the popular misconception being that anyone with less than a prime loan is some kind of derelict -- a slacker who probably should never have gotten a mortgage, no matter how high the rate.

But just who are these sub-prime borrowers we keep hearing about? Are they really all just deadbeats?

Certainly, a few are scofflaws who never intended to meet their mortgage obligations. But for the most part, they are simply people who wanted to get on the housing gravy train while it was still chugging uphill.

Yes, a certain number shouldn’t have been approved for a mortgage at any price. Their financial situations were so faulty that there was simply no way they could be successful owners.

But a closer look reveals that this group of borrowers cuts a wide swath across society.

“It’s difficult to define a sub-prime borrower,” said Jay Brinkmann, vice president of research and economics at the Mortgage Bankers Assn. in Washington, D.C. “But this much is true: If you make 11 payments during a year but at some point have difficulty coming up with the 12th one, that’s what makes you sub-prime. And if you are living on the edge and miss just one payment, it is very difficult to get caught up.”

According to the trade group, most sub-prime borrowers are making their house payments on time -- 78% of them are current on payments.

Still, the default rate for sub-prime borrowers is much higher than that of prime borrowers. It’s also somewhat higher than it was a few months ago, and it will probably go higher in the future. But for now, nearly four in five sub-prime borrowers are making their payments every month, a fact that gets overlooked in the horrid details of mortgages gone bad.

That said, let’s take a closer look at the borrowers classified as sub-prime. To some extent, there is overlap among groups described below. But to paraphrase the great philosopher Pogo, we have met the sub-primes and they are us:

• Former primes: Fine, stand-up people often have life events that knock them down financially. Perhaps they lost a job, are divorcing or suffering from a catastrophic illness.

Greg Lumsden, president of Full Spectrum Lending in Pasadena, the sub-prime lending division of Countrywide Home Loans, calls them “fallen angels.”

“It’s not their fault,” Lumsden said. “When we got into the sub-prime business in the late 1990s, the majority of borrowers came from prime land. They were prime at one time but somehow got into trouble.”

• Future primes: People who have messed up in the past are taking higher-rate loans with the promise that if they make their payments on time for one or two years, their rate will be lowered automatically. These loans are known variously as “credit-repair” or “credit-comeback” mortgages, and they work, Lumsden said. Some 55% of sub-prime borrowers who are refinancing today are moving from sub-prime to prime status.

• Rookies: Many first-time buyers simply lack a large enough down payment or do not have the extensive credit and/or employment histories necessary to qualify for the best rate and terms. About a third of all sub-prime loans were made to first-time borrowers, according to the mortgage association’s figures.

• Second homers: A handful of all sub-prime loans went to people buying vacation (2%) or investment (5%) properties, according to the group’s figures.

Either way, it’s safe to say that although their credit records may have been good enough to purchase a first home with a prime mortgage, they didn’t have enough credit to obtain a prime loan on another home.

• Fraudsters: It doesn’t matter to con artists what rate they are charged; they don’t intend to make any payments. Through numerous scams, their goal is to collect huge sums of money from lenders and then head for the hills, never to be heard from again. • Ne’er-do-wells: These are the people who never should have been approved, period. They are habitually late payers, or non-payers, whose finances are a mess.

• Victims: The media is full of reports about unknowing borrowers who have lost their homes due to unscrupulous mortgage professionals.

• Should haves: Then there’s the group who could have qualified for a prime rate had their applications been underwritten more carefully or even correctly.

Perhaps loan brokers pushed them into sub-prime territory to collect a larger commission. Whatever the case, they should have received a prime loan but didn’t.

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Lew Sichelman can be reached at lsichelman@aol.com.