California Sub-Prime Bailout: Rewarding the Feckless

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Governor Schwarzenneger brokered a bailout for California sub-prime borrowers with four major servicers:

Countrywide, GMAC, Litton and HomeEq – which collectively service more than one quarter of subprime loans to people with poor credit – agreed to maintain the initial, lower interest rate for some subprime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate.

You had to see it coming. California is a mess right now with foreclosures. An argument could be made that sub-prime borrowers weren’t charged enough for the risk lenders took on them. Did the Governor, in fact, reward the feckless few who blindly bought into an inflated market? Does the measure penalize the responsible who waited for realistic prices and saved their sheckles for a down payment?

Two stipulations of the bailout are:

(a)- the borrower must be making timely payments, and

(b) the borrower must demonstrate an inability to service the higher payment.

While sub-prime loans are traditionally earmarked for the credit challenged, lenders extended these loans to good credit borrowers. Those borrowers bought a home that they couldn’t afford, with no money down. This program may very well reward people who lied to get a “smokin’ deal” and who now cry foul when that subsidized deal is taken away. The only exit strategy these borrowers had was to refinance out of the loan. That strategy was predicated upon a continual rise in property values. I know this; I work in the eye of the hurricane.

So, does Gena Reide. She’s a real estate broker in Sacramento, a community that has been hit hard by the meteoric rise in prices and subsequent drop back down to reality. Her ebullient report about this measure suggests that it is an idea that is long overdue.

Many have said that the homeowners in foreclosure should take responsibility and not receive any bail-out help Federally. It’s time that everyone realize that this doesn’t just effect those homeowners losing their homes, it effects ALL of US. New laws need to be enacted where this type of lending practice is not to be readily used for the masses. More regulation and protection for the home buyer needs to be established in the lending field.

Lenn Harley, however, asks the questions the rest of the country must be dying to ask. She wonders why so many Californians have sub-prime loans. Her market, suburban DC, experienced the same price appreciation as California yet is not experiencing the fallout.

IS CALIFORNIA REAL ESTATE THAT DIFFERENT FROM MARYLAND?
During those years, I supervised about 15-20 agents. During those years, we settled about 450 home purchase contracts for Maryland buyers. I can remember only one (1) sub-prime loan closing. It is possible that some of our buyers closed sub-prime loans without my knowledge. However, I was in close communication with our home buyers in Maryland. If there were cases where our buyers were not qualifying for conventional loans and were sent to subprime borrowers, it must have gone very smoothly or I’d have heard about it.

The one subprime of which I’m aware was a buyer that I helped myself because she was referred to me by my attorney. The buyer contracted for a new home and was rejected by the builder’s lender, but they agreed to outside financing. It was a difficult loan but finally closed with a 2/27 on which the buyer defaulted after 5 months which surprised me not one bit. The mortgage loan officer that did the loan worked like a dog to get it closed. It was the hardest loan I had ever seen and probably that great loan officers most difficult loan too. He took the loan only because he received 35-35 loans a year from buyers referred by Homefinders agents including myself. If all subprimes are as difficult as that one, I don’t envy the loan officers who do them on a regular basis. When the loan officer said he “would get it closed”, I knew he would because in 15 years, he had never failed to close a buyer I brought to him. I believe we both regretted that one.

Is this measure politically motivated? You betchya. The Governator is taking care of his own, regardless of the inequities it levies on the rest of the country. The lenders are in a bind so they’ll appreciate this artificial market stabilization until the rest of the country catches up. This is Nixonian economics, plain and simple. THAT interventionist policy exacerbated rather than solved the problem of inflation.

What I’m about to say will be unpopular in the Golden State; housing prices are artificially inflated and need to come down meet rational economic models. Borrowers who make $90,000 annually can’t afford $700,000 homes. You can intervene in markets but the price of Amsterdam tulips will naturally gravitate towards its real economic value.

I’m a pragmatist. This is a dumb idea but I’ll play ball. You got one guy looking this way, the other guy looking that, and I’m the guy in the middle saying “Whaddayawantfromeme?”

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