February 2, 2013

The Dignity Mortgage: Subprime with Training Wheels

Here’s a look at some new mortgage meshuggeneh from Burbed reader nomadic.

Housing advocates push for new type of subprime loan

The Dignity Mortgage would have a higher rate for higher-risk borrowers but include rate cuts after five years of on-time payments.

130201-latimes-dignityBy E. Scott Reckard, Los Angeles Times; January 28, 2013, 5:53 p.m.

PHOTO: Pattie and Ollie Sibug would like to buy their San Diego town house, which they are renting for $1,750 a month. They are among those who may benefit from a proposed subprime mortgage program. (Allen J. Schaben, Los Angeles Times / January 29, 2013)

With home prices rising, interest rates falling and builders building, some prominent housing advocates are calling for a new kind of loan for buyers with lower incomes or bad credit.

They’d like to call it the Dignity Mortgage, but it has another name — one that’s become more of an epithet since the housing crash: subprime.

Applicants might include people caught in the early stages of the mortgage meltdown who have since rebuilt their finances, said Faith Bautista, who heads the National Asian American Coalition.

"They lost their work, their homes and their credit scores four or five years ago," Bautista said.

And let’s see what nomadic has to say about this idea.

These people are pushing for a mortgage that not only gives them better terms after five years of timely payments (which seems reasonable) but they want the extra interest paid during the "trial" period REFUNDED to them after those five years. In other words, the banks take more risk but don’t actually get paid for it in the end. Not to mention all of the other extra costs of the program (e.g., "extensive" financial counseling). WTF? Also thought it ridiculous that the rate goes down to what people with "sterling credit" and 20% down are paying. I haven’t done the math, but I suspect people aren’t necessarily paying off 10% of the purchase price in the first five years of their loan.

Think this is a better way to treat the poor people who shouldn’t have been buying houses at all but want another swing at the property piñata?  Or was it all the banks’ fault from start to finish? Aaaaaaaaaand, this is an Open Thread.

Comments (15) -- Posted by: madhaus @ 5:16 am

15 Responses to “The Dignity Mortgage: Subprime with Training Wheels”

  1. PK Says:

    Or, emulate it today with your good credit – take the escrow account option and ask your bank to force higher payments in the beginning and to let off the gas at year 5.

    Oh, right, that won’t bring back subprime. Well, there’s always FHA, where the current limit to get in on the party is a FICO 580 (previously 500, with a 10% down payment). You’ll also get a PMI payment, which, ironically, can disappear after 5 years.

  2. SEA Says:

    “but they want the extra interest paid during the “trial” period REFUNDED to them after those five years.”

    As a lender I would love this. I charge you a higher rate, and if you pay 60 months, then I’ll apply part of the extra cash paid to principal, without interest. If you don’t do everything perfectly correct, I keep it.

    People get all involved with games, and then so many wonder why they have problems.

  3. Petsmart groomer Says:

    > As a lender I would love this.

    You’d get 5 years of revenues you can’t recognize until later and then if you apply that to the principal you reduce your future income.

    Or were you being sarcastic?

  4. SEA Says:

    “You’d get 5 years of revenues you can’t recognize until later and then if you apply that to the principal you reduce your future income.”

    That reduced future income needs to be discounted to present value. Beyond that, generally mortgages may be paid early without penalty.

    Some people love to send the government extra cash, and then get a big refund. I don’t understand that either.

  5. nomadic Says:

    I saw it as the borrower paying a premium for the extra risk the lender assumes during the first five years. Why should the lender have to give all of that money back if the borrowers really got their shit together? The risk was real during the trial period. Plus there’s the matter of the extra administrative costs of such a program.

  6. SV Shopper Says:

    Investors rule the market right now. There is no inventory for regular buyers.

  7. madhaus Says:

    We know SV, but you were priced out forever even in bear markets. Water is still wet, too.

  8. SV Shopper Says:

    I don’t think you get it. You would be in the same boat if you are looking now.

  9. SV Shopper Says:

    I believe there are sufficient housing units in the Bay Area, but everyone wants to be a landlord now days, therefore there is no inventory left for real home buyers.

  10. very amused Says:

    Oh ho Real Home Buyers?

  11. nomadic Says:

    The Real American Way: the rich get richer and the rest of you can remain Rentards?

  12. SEA Says:

    “The risk was real during the trial period.”

    It’s often very difficult to predict the future.

    Some people recently purchase AAPL near $650 knowing that it was going straight to $1,000.

  13. madhaus Says:

    I’m in the process of setting up a Facebook page for Burbed (I’m only 5 years behind the times here). Getting accepted as a Developer is amazingly difficult because every phone number I’ve provided for “verification” has failed to pass along the text message they’re supposed to generate. Once I get that working I can start setting up the links here. For now, please Like us on Facebook by visiting.

    We’d also love to hear your suggestions for what to put on that page other than links to our articles.

  14. South Bayer Says:

    Yes, it is very difficult to predict the Bay Area future, almost as difficult as it is to predict the Bay Area weather.

  15. More Bubblicious Signs of Bubbling Bubblicity [Burbed.com] Says:

    […] subprime, you know what else is back? Subprime mortgages! That article we featured last weekend on the Dignity Mortgage wasn’t the only sip of subprime sangria.  Gotta love this […]

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