Morgage Refinance

Wikipedia's entry says that subprime lending is also known as second chance lending, near-prime and B-paper. It means lending at a higher interest rate than the prime rate.

Only prime borrowers — those with the best credit scores — get the prime rate.

In America, subprime mortage lending means lending that does not meet Fannie Mae or Freddie Mac guidelines.

In 2006, the Wall Street Journal wrote that 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans.[1]

Mortgage Rates

Subprime also refers to banknotes taken on real estate that won't sell on the primary market. These are often investment property loans.

The self-employed often take subprime loans.

Subprime loans are risky for both lenders and borrowers. Why? Because of the combination of high interest rates, less than stellar credit and the higher likelihood of bad financial developments for the subprime borrower.

Because of this added risk, subprime loans charge higher interest rates than A-paper loans due to the perceived increased risk.

Aside from mortgages, other subprime loans can be taken out for cars and credit cards and short-term "payday" loans.

Subprime lending has a lot of critics. They allege it is predatory. That it aims at borrowers who are too stupid to understand what they are signing.

Subprime loans often demand higher fees and often lead to defaults, seizures, strokes and foreclosure.

There have been charges of mortgage discrimination on the basis of race.[2] Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.[3]

Credit around the world has been reduced because of 2007's subprime meltdown in America. Millions of borrowers must pay higher rates because of it. Hundreds of thousands of borrowers have been forced to default or file for bankruptcy. Hundreds of subprime lenders or brokers have closed, some have filed for bankruptcy and several have been acquired.

VA Loan

Some subprime originators (mortgage companies or brokers) sell high-risk residential or commercial loans with a variety of gimmicks that can trap low income borrowers into loans with increasing yield terms that eventually exceed borrower’s capability to make the payments. Most of these loans are originated for the sole purpose of selling them into securitization conduits, which are special purpose entities (REMICs) that issue Residential Mortgage Backed Securities (RMBS), bonds, securities and other investment vehicles for resale to pension funds and other fixed income investors. The same process takes place for some commercial mortgages (CMBS). Commercial mortgages carry the “Depositor” warranty by a Mortgage Loan Purchase Agreement (MLPA) registered with the SEC as part of securitization registration.

Some of these Mortgage Originators are owned or controlled by major financial institutions which provide a “Warehouse” line for their lending. For example, First Franklin was owned by Merrill Lynch and WMC was owned by GE. These financial institutions then remain in control of these loans as “Trustee”, “Servicers” and “Controlling Class” of the REMIC trusts in hopes of deriving significant fees and other income from management of Taxes, Insurance and Repair Reserve Funds required by the terms of these mortgages.

In most cases, should these loans default, the Servicing is passed to “Special Servicers” who stand to reap significant “Workout”, “Foreclosures” and Real estate owned (REO) management fees. The Special Servicers are directed by “Directing Class” or “Controlling Class” which comprise of majority holders of the lowest class of REMIC Trust securities also referred to as “First Loss” or “B-Piece” holders.

http://www.revver.com/video/789221/subprime-lenders/

Upon liquidation of foreclosed assets or” mortgage collateral” usually at a Sheriff auction, the Special Servicer purchases the collateral for a dollar over the highest bidder, at a fraction of the original Mortgage loan. The difference between the foreclosure sale and the note amount is referred to as shortfall and becomes a liability of the Borrower and Guarantors. This shortfall continues to accumulate interest at default rates which form additional “Servicing Income.” The various fees and income generated from servicing these loans form the basis of FASB MSR which is booked as an asset by these financial institutions thus driving up the corporate equities, shareholders values and management bonuses.

The shortfall of loan repayment is usually repaid as a result of ”Repurchase Demand” by Special Servicer on GSE or loan seller to REMIC Trust also called “Loan Depositor.” The purchased collateral at auctions by Special Servicers are referred to as REO properties which then can be marketed and sold for market value. Special Servicers usually keep the “Upside” or difference between auction price and market sale of the collateral. These foreclosure fees and REO income form a major incentive for Servicers to purchase the “Servicing Rights” of the REMIC trusts from Trustees who, depending on the terms of the Pooling and Servicing Agreement (PSA), have the authority to replace Servicers. It is not uncommon for a predatory Servicer to pay millions of dollars to procure the “Servicing Rights” of the REMIC trusts in hopes of successful foreclosures and equity stripping from Borrowers, Guarantors, Loan Sellers and Investors.

REMIC Trusts are “Passive” or “Pass-Through” Entities under the IRS code and are not taxed at trust level. However, the bond-holders are expected to be taxpaying entities and are taxed on interest income distributed by the REMIC trusts. REMIC trusts are forbidden from any other business activities and are taxed 100% on any other income they may generate which is referred to as “Prohibited Income” under IRC 860 Code.