Friday, February 5, 2016


I am starting to see more data and articles referencing the rise in subprime mortgages.  The stewards of our Mortgage Industry would do well by having longer memories.  There is a reason prudent risk assessment and the 5 Cs of credit hold true through all economic cycles.

A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages“The United States (U.S.) subprime mortgage crisis was a nationwide banking emergency that coincided with the U.S. recession of December 2007 – June 2009.  It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. The expansion of household debt was financed with mortgage-backed securities (MBS) and collateralized debt obligations (CDO)” with high concentrations of subprime mortgages “offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused massive defaults.  While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.  A proximate cause was the rise in subprime lending. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S.  These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.

The Five Cs of Credit: A method used by lenders to determine the credit worthiness of potential borrowers. The system weighs five characteristics of the borrower, attempting to gauge the chance of default. 

The five Cs of credit are:

Character    - Borrowers reputation and intent to comply with agreement
Capacity      - Debt to income before the new loan and after “Affordability”
Capital         - Down payment and ability to survive periods of loss of income
Collateral     - Mental reminder and commitment to loan by having “skin in the deal”
Conditions   - Risk vs Rate must be acceptable to the Lender to extend the loan

Subprime lending generally disregards the above proven standards for approving loans in return for higher rates and fees. 

The 2007-2008 financial crisis was built on lending from 2002 through 2006.  The 2002 economic data and markets have a strong similarity to what we are starting to see today.  The same players are beginning to emerge under new name plates with the same sales pitch as 2002 hoping time has dulled the industry’s memory.  Their misguided sales pitch "You can close more deals and make more money on the backs of those who could not meet conforming mortgage guidelines.  You can do deals others turned down and win favor from referral sources"  Awesome Competent Service and not creating a default concentration in your referral sources projects is the only way to protect clients and your trusted partners.

How many companies that concentrated in subprime products survived the financial crisis of 2007-2008? 
How many of you reading this lost a job due to your company’s choice to originate subprime loans? 
How many of you had to reinvent yourself due to the company you trusted making this choice? 
How many of you built a successful career at a subprime company only to have your world turned upside down?

Let’s not repeat this pattern……  If your company makes the choice to concentrate in subprime lending, look at the history. 

I am passionate about the Mortgage Lending Industry and feel compelled to remind our industry of 2007-2008.  As stewards of our industry, we should forgo the appearance of easy approvals or unsustainable products just for profit.  We should put our Employees, Shareholders, Clients, and the Stability of our Financial System first.  There is no short cut to success, it is a slow methodical process that builds a solid foundation for growth.  We have a fantastic 5 years ahead of us; however, to sustain it we must be prudent and hold firm to sustainable strategies.

Cal Haupt
Chairman and Chief Executive Officer
Southeast Mortgage of Georgia, Inc.


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