4 things about Subprime loans in 2023

Subprime loans are coming back more as lending is getting expensive.
2023 SubPrime Loans Video

subprime loans back like in 2007?

Let’s talk about 4 things about Subprime loans in 2023. It does feel like the subprime loans are coming back in May of 2023. I received a few new loan programs from local lenders. They call it “down payment assistance” or “closing cost assistance” programs. I’m learning about the programs to help some home buyers who might benefit from using these.

I couldn’t help comparing it to the subprime loans that were popular in the mid 2000’s before the market crash. So, I’ll explain my thought process here:

What is a subprime loan?

Subprime loans are higher risk loans given to borrowers with:

  • Below 620-640 according to FICO (Fair Isaac Corporation) credit score
  • Below 660 according to Federal Deposit Insurance Corp (FDIC)
  • The score standard varies depending on websites… which is a bit odd.
Are we seeing more subprime loans in 2023?
Photo by Andrea Piacquadio on Pexels.com

To make more loan programs available to borrowers who may not be qualified with traditional conventional loan qualifications.

  • Experienced a judgement, foreclosure, bankruptcy…
  • Carries higher rates and fees than prime loans
  • Higher rates to compensate for the lenders for taking greater risk of borrower’s defaulting
  • Interest-only, fixed and variable rate programs
  • Variable rate subprime loan payment can increase significantly over time
  • Aka, expensive loan to borrow for financially weak borrowers (poor credit scores and issues on their credit reports)

I personally used the subprime interest-only loan as a home buyer in 2005 when I bought my first house in Portland, Oregon. I didn’t have a job at the time and I still scratch my head how I was able to get a loan without a job. It was called, “Stated income” loan. You tell the lender how much you made the last two years, and they believe you without verifying the information. As far as I know, those stated loans don’t exist in 2023.

why new loans are similar to subprime loans?

Some of the details of these new programs that are coming up resembles the mid-2000’s subprime loans.

  • 101.5% LTV (Loan-To-Value Ratio) lending
  • Available to poor credit score borrowers: 620 credit score may be qualified for downpayment/closing cost assistance programs
  • Not requiring downpayment

If a borrower is financially strong, but somehow hasn’t saved the funds for downpayment and closing costs, programs like these can bridge the gap and allow the borrower to purchase a home sooner than later. However, 620 credit score indicates that the borrower may not be financially strong indirectly. So is this a smart choice for the borrowers?

What could go wrong?

Here are some scenarios where things could go wrong for borrowers:

  • Borrowing more than they can afford
  • Potential of dealing with rate hikes in the future if they get adjustable rate loans
  • If housing market crashes 10-20% after these programs being used too widely in the next 2-4 years
  • If variable subprime loan becomes unaffordable to borrowers and home price declines, the demand would slow down and we might see more foreclosures. Possibly no options to refinance or sell without paying out of pocket to make up the difference (aka short sale)

What you should do

If you are utilizing one of these down payment assistance and/or closing cost assistance loan programs:

  • Make sure to understand the fee and extra costs of the loans
  • How they might affect your monthly payment for now and in the future
  • Avoid the Variable Rate loans to protect against potential future rate hikes
  • Stay within your budget: buying a property you can truly afford and moving to lower priced cities

Make sure to understand your financial situation by educating yourself before jumping into a homeownership with programs like these. There’s no free lunch.

Robert Shiller Said…but Media says this?

Tuesday real estate update 3/28/23


Robert Shiller with CNBC

This is what Robert Shiller said on CNBC interview: https://youtu.be/bZyaKPlWvbc

“Maybe if you have a chance to delay your purchase, it might be a good time to do it. You might get it a little cheaper in another six months.”

“I think it works pretty well most of the time and I wouldn’t tinker too much with it. We have smart people on the Fed and the Treasury Secretary I admire, Janet Yellen. They may have to accept something of a recession.”

Shiller acknowledged there are other factors besides economic conditions that determine “the right time” for any buyer or seller to act, depending on their situation.

“Home purchase is such a family decision, I’d hate to overreact,” Shiller added.

“We do have a declining market at the moment, but there are costs to not selling at the right time, the convenient time, or you might lose a house that you liked to somebody else. I don’t think it’s an easy answer to that question.”

What realtor sees in the current market

  1. Micro markets are still seeing multiple offers on entry level homes. 
  2. Good deals are in any market, just need to do the work. Always be ready and keep looking for a right deal.
  3. Robert Schiller says in a very safe manner. Because he doesn’t really know what will happen. 
  4. More expensive to buy, but cheap 3% mortgage bus is gone and we need to adjust to new norm to be in the market.
  5. White board talk:
    1. Assuming 19% decline, how do you time it to get the best deal? Simple answer is, you just can’t time the market.
    2. Light weight MMA fighter (Fed funds rate and mortgage rate) choking on heavy weight fighter (real estate market)
  6. Talk to a few realtors in your area to know what’s going on in your market.
  7. 2008 vs 2023
    1. Bank issues
    2. Job loss 2.6m in 2008 vs. job increases in Jan 2023
    3. Subprime lending vs Tight lending environment
    4. High inventory. Vs Historic low inventory
    5. 6% mortgage rate vs. 6.25% today
    6. Inflation 3.8% vs 6%
    7. War in 2008 vs War now
    8. Swine flu vs Covid

Don’t pay attention to headlines, talk to local experts, read between the lines, stay in the market and you can always find a good deal in any market!

Tuesday Real Estate Update: Silicon Valley Bank Shut Down and Property Sharks

Tuesday Real Estate Update #TREU: Silicon Valley Bank Shut Down and Property Sharks

Audio only

Silicon Valley Bank bail out, what’s coming?

Silicon Valley Bank bail out, fractional banking only requires 10% reserves of deposits, FDIC covers less than 2% of deposits? $40 Billions withdrawn in one day?

At the current trend, we may expect the following:

  • Maybe more banks mergers coming.
  • Tighter mortgage lending as banks are getting the pressure of keeping better reserves and books.
  • Potential for more investment money coming into real estate.
  • More cash buyers and higher downpayment buyers will have bigger leverage.
  • Higher rate, cooler house price continues this spring.
  • New home builders will slow down due to expensive to borrow money and new home demand is softer. This exacerbate overall inventory shortages.

tips for home buyers and owners

  • Anything more than $250k in your account should be moved to separate bank accounts for federal insurance coverage.
  • Property sharks out there. They do borderline illegal whole sales. Check with your local trustworthy realtor to see all the options you have, before talking to any of these whole sale, property sharks. Almost 99.9% of the time, you will make more money by going through the traditional channels of listing your home for sale publicly and attracting many buyers.

*not financial advise, Check with qualifies CPA.

Tuesday Real Estate Update March 21st, 2023

QE, Sub 6%?

In today’s #TREU

  1. Real Estate Market Overall Trend in the last 3 years.
  2. Financial Sector volatility and what we might see in mortgage rate.
  3. Buying New Homes in 2023 the right way.
  4. Residential vs. Commercial landscape shifting.
  • Year over year trend may appear sluggish, but it’s more of 2021 and 2022 fast train slowdown, not market crash like some fear mongering media portrays. So don’t panic.
  • Poorly managed banks are being bought up, so quantitative easing (QE) might be coming sooner than expected. Not because we solve the inflation problem, but to prevent banking system collapsing.  With that pressure, we may see lower than 6% mortgage rate this spring and summer which fuels the real estate market. Typically speaking lower interest rates, higher real estate price. Higher interest rates, lower real estate price.
  • New home builders are offering lower interest rate and price discounts. Many home builders use short term financing. With a higher cost to borrow money, they need to sell left-over inventory to move to new phase of construction. So if you are looking for a new home this year, ask for more incentives and price reduction. And as always look for the best lot in the subdivision. How to find a right home in new subdivision video from 2019:
  • Calmer waves in residential, bigger waves in commercial section. Due to high office and retail vacancies, especially in downtown areas. Big tech layoffs creating potential ownership change in commercial real estate as home office demand continuously growing since the pandemic.