Subprime Loans let more people buy their own homes
Washington and her husband Keith, 39, could not afford to live this American Dream were it not for a city program for first-time home buyers, credit counseling and most of all — subprime loans.
“Subprime” has become the dirty word of the global economy. Thousands of Americans are in foreclosure because they can’t pay back loans they never would have gotten if the market didn’t accommodate those who could not qualify for conventional home loans.
In many cases, people got loans using no-doc applications, which didn’t require verification of their income, employment and credit, says Ron Chicaferro, a mortgage consultant in Scottsdale, Ariz. “People were getting into housing that really had no business being there,” Chicaferro says.
As subprime lenders shut down, Washington knows she’s among the lucky ones.
“It gave a lot of people an opportunity to secure property who would not have,” says Washington, who grew up on the South Side and was satisfied renting a house from her cousin until six years ago.
She and her husband, a prosthetic limb maker, realized owning made better financial sense, even with their spotty credit history. With help from the city and the Good Shepherd Foundation, the Washingtons set about writing letters to creditors, challenging reports, working out payment plans.
“I was scared to death at first because of everybody’s horror stories,” Washington says. Creditors “wanted their money, so it worked. Our credit scores went up. People say our situation is a miracle.”
Illinois is among at least 30 states with predatory-lending laws to protect borrowers. And a new state law that goes into effect next July aims to further protect subprime borrowers by requiring them to get credit counseling before securing loans.
The current lending crisis resonates with the Washingtons because when Keith was out of work for more than a year, their adjustable rate mortgage kicked in.
”That’s where we ended up in trouble,” says Washington, whose voice lowers as she explains how they faced an untenable $600-a-month jump in their mortgage.
”Because we bought a house in a good location, the equity was insane. We refinanced, paid off a car, paid off some bills and got the roof fixed,” she says. ”We’re fine now. No more ARMs for me.”
Will the market’s reaction keep people like the Washingtons from buying — and keeping — homes? The subprime market is too big to ignore, says James Shilling, a DePaul University real estate expert. He estimates that 20 percent to 25 percent of recent loan originations have been in the subprime category.
”It’s going to take some adjusting,” Shilling says. ”By this time next year, things will return back to normalcy where loans will be available at a reasonable price. We don’t need to cut credit off to these people.”