The Problem of Prime Borrowers Getting Sub-Prime Loans

The development of the sub-prime market has made mortgages (and home ownership) available to a segment of the population that otherwise would have been shut out of the market. That’s the good news. The bad news is that some borrowers who are eligible for loans from mainstream lenders end up in the sub-prime market. They are prime borrowers but they pay sub-prime prices.

This happens partly because of the difficulties some borrowers can have in determining whether or not they qualify in the mainstream market. Underwriting requirements can differ from one mainstream lender to another, so it is quite possible that a borrower with problems, who is not eligible at one lender, will be eligible at another.

However, the main reason some prime borrowers end up paying sub-prime prices is that they are solicited by sub-prime lenders and go along with the deal pitched to them without ever contacting a mainstream lender. Very few sub-prime loan officers will give up a commission by referring a qualified applicant to a mainstream lender. The deal will very likely go down at sub-prime prices, therefore, regardless of how qualified the borrower may be.

Sub-prime lenders market aggressively to home-owners who already have mortgages. A major pitch is the cash that borrowers can take out of their properties through a cash-out refinance. They target groups and areas that promise to have many sub-prime borrowers – lower-income black neighborhoods, for example. Many occupants of such neighborhoods will be sub-prime, but those who aren’t and who go along with the soliciting firm will pay sub-prime prices.

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