RateWatch #375 – Sub-Prime Loans 
September 27, 2003 by Dick Lepre
dicklepre@rpm-mortgage.com

What's Happening

Sub-Prime Loans

Loans for People With Credit Problems

Almost all of the content of my WWW site and RateWatch newsletters deals with what in the
mortgage industry are called "A paper" loans. "A paper" means good credit.

Good credit is attained with a credit score of 680.  It may be had with a credit score of as low as 640 with mitigating circumstances.

Just below A paper is A- paper.  A good credit history with a high debt ratio.  As credit lates,
collections, mortgage lates, judgments and tax liens start piling up credit deteriorates to B, C, or D.

These are some of the things that make for really bad credit:
1) bankruptcy in the last 6 years
2) foreclosure or Notice of Default
3) persistent 30 day mortgage lates
4) 60-day (or more) mortgage lates
5) persistent revolving credit lates.

What Makes the Grades?

The worse your credit history the higher rate you will pay. Lenders have rules as to what
constitutes B, C or D credits.

What Kind of a Loan Do You Get?

Put it this way: you are not going to start bragging about your rate.  B-paper loans are to bail you out of emergencies.  They usually involve "cash out" to cover debt or liens.  If you are getting a B-paper loan it is likely to be an ARM with a high margin.  The following is what I usually suggest: get a loan fixed for 3 years.  It will usually have a prepayment penalty.  Stick with it for 3 years and keep absolutely perfect credit for those 3 years. Then refinance it with an A-paper loan.  A
B-paper loan is not a "keeper".

The Procedure

I suggest the following procedure for these loans: fill out an application, let us get your credit report, we will send it to our underwriters to be rated and convey the results to you. This will give you an idea of what rate you will get. The rate will depend primarily on your credit score(s) and the loan-to-value ratio.

Some Considerations

Investors had developed a fondness for B-paper loans because of the high yield.  During 1998
we had the beginnings of liquidity crisis.  Investors were concerned about risk just when LTCM was saved by the Feds.  The B-paper market almost disappeared overnight.  It has made a
comeback.

Denial

If you have serious credit problems, recognize them and realize that there are solutions.  Do not let debt cause your mortgage to become late, do not let mortgage lates cascade to notice of  default. Do not be concerned about being in an embarrassing situation. B-paper loans are often
salvation. Getting a B-paper loan is like going to the emergency room on a sunny Saturday morning. It may not be your first choice of things to do but it beats sitting at home and bleeding to death.

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