Subprime myths and facts

Myth #1: Only poor people get subprime loans.

False. People who take out subprime loans come from all walks of life. There is no typical subprime borrower; rather, subprime loans are given to people with poor credit histories (or short credit histories), people who would rather not share their tax returns (and thus must take out a "stated-income" loan), and speculators who plan on selling the house for a profit in a few years before the interest rate adjusts. Nevertheless, the U.S. Department of Housing and Urban Development says that subprime mortgages and predatory lending disproportionally affect minorities and low-income families:

1. Subprime loans are three times more likely in low-income neighborhoods than in high-income neighborhoods.
2. Subprime loans are five times more likely in black neighborhoods than in white neighborhoods.
3. Homeowners in high-income black areas are twice as likely as homeowners in low-income white areas to have subprime loans.

Myth #2: All subprime lenders are predatory lenders.

False. Subprime loans do have a legitimate place in the market. They are useful for people who do not wish to disclose all the information required for a conventional loan and speculators who wish to resell a house quickly for a profit.

Myth #3: All foreclosures end in eviction.

False. According to real estate agent Dennis Hawes, most foreclosures do not end in eviction; in his experience, most former homeowners move out before the new owner has to initiate legal proceedings.

Myth #4: Banks want to foreclose -- they get more money that way.

False. Most banks want you to keep paying your mortgage and interest for as long as possible; foreclosure is usually a last resort. Fforeclosure can be expensive for banks -- not only do they generally lose money on the homes themselves, but they also have to pay lawyers, court costs and other expenses.

Myth #5: Most foreclosures in the Rockbridge area are due to subprime loans.

False. Hawes says that only about half the foreclosures have subprime loans, and not all borrowers default on subprime loans.  There are other reasons a homeowner defaults, including a job loss, divorce or high medical bills.  Refinancing also claims a lot of homes.

Myth #6: Subprime loans are always risky.

False. Actually, subprime lending is a good way for low-wage earners to purchase a house if they can increase their wages as the mortgage payments increase.  Subprime loans are also useful to investors who want to turn around a house in a couple of years while the interest is low. Foreclosures on homes purchased with subprime loans generally occur because the borrowers are relatively high credit risks for the lenders.

Sources: U.S. Department of Housing and Urban Development, Dennis Hawes