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For all the negative rhetoric around subprime loans, they enabled me and others I knew who were young and self employed to own homes. They aren’t always bad, t

For all the negative rhetoric around subprime loans, they enabled me and others I knew who were young and self employed to own homes. They aren’t always bad, they aren’t always crazy balloon loans or predatory instruments. Sometimes they allow someone who has an alternative life circumstance to not be excluded.

opportune 7y ago
Yeah, subprime lending often makes a lot of sense for the person taking out the loan. If the rents are high relative to expected mortgages/recurring costs in your area, it will pay itself off very quickly (minus the risk of default you open yourself off to). And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. It also makes a lot of sense if you have reasonable expectation of a large amount of income growth / expense decrease that will free up cash flow. For example, if a household member is finishing up school or in training for a more lucrative field (like an MD in residency) it might make sense to be house poor for a small period of time to lock in rates, take advantage of a nice buying opportunity, etc. Or if you are about to be released from child support / settlement obligations, and thus will experience some increased cashflow, could also make sense. It's not fair to assume that everyone with poor credit or lack of capital for a downpayment is a bad person to lend to, HOWEVER, in the general case it's probably true that in the absence of impending changes in household finances, an inability to get good credit or accumulate savings is a negative signal. And unless you are a small lender, your subprime loans probably aren't discriminating against people who are about to increase income/decrease expenses while building better credit, and people who just suck with money.
- bachmeier 7y ago
  > And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. Well, that might be a good thing when house prices are appreciating at a crazy rate, but it also locks you in when the housing market and/or the economy crashes. If you're renting, you lose your job and you're stuck with your lease for maybe another six months (assuming you don't break it). Once you buy a house, you're stuck with it until you can sell it or foreclosure, even if the price goes down or you lose your job.
- tathougies 7y ago
  > poor credit or lack of capital for a downpayment is a bad person to lend to There is a huge gulf between those who have unconventional sources of income and those who lack capital for a downpayment or who have poor credit. Poor credit is caused by things like not paying off previous loans / carrying high balances. Not having a down payment is a sign you have not yet demonstrated an ability to save enough, or don't have enough income to save enough, both of which seem reasonable criteria off of which to base a lending decision. The parent commenter described a circumstance -- self-employment -- that is wholly unrelated to both poor credit and an inability to save a down payment. You made the leap between the two. We need to end this kind of thinking. > a nice buying opportunity, etc Equal housing laws mean that -- in the absence of very particular circumstances -- any opportunity for this hypothetical student would also be available to more reliable debtors.

opportune 7y ago

Yeah, subprime lending often makes a lot of sense for the person taking out the loan. If the rents are high relative to expected mortgages/recurring costs in your area, it will pay itself off very quickly (minus the risk of default you open yourself off to). And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. It also makes a lot of sense if you have reasonable expectation of a large amount of income growth / expense decrease that will free up cash flow. For example, if a household member is finishing up school or in training for a more lucrative field (like an MD in residency) it might make sense to be house poor for a small period of time to lock in rates, take advantage of a nice buying opportunity, etc. Or if you are about to be released from child support / settlement obligations, and thus will experience some increased cashflow, could also make sense. It's not fair to assume that everyone with poor credit or lack of capital for a downpayment is a bad person to lend to, HOWEVER, in the general case it's probably true that in the absence of impending changes in household finances, an inability to get good credit or accumulate savings is a negative signal. And unless you are a small lender, your subprime loans probably aren't discriminating against people who are about to increase income/decrease expenses while building better credit, and people who just suck with money.

bachmeier 7y ago
> And it allows you to lock in a monthly payment for potentially decades, which has a massive amount of value by itself. Well, that might be a good thing when house prices are appreciating at a crazy rate, but it also locks you in when the housing market and/or the economy crashes. If you're renting, you lose your job and you're stuck with your lease for maybe another six months (assuming you don't break it). Once you buy a house, you're stuck with it until you can sell it or foreclosure, even if the price goes down or you lose your job.
tathougies 7y ago
> poor credit or lack of capital for a downpayment is a bad person to lend to There is a huge gulf between those who have unconventional sources of income and those who lack capital for a downpayment or who have poor credit. Poor credit is caused by things like not paying off previous loans / carrying high balances. Not having a down payment is a sign you have not yet demonstrated an ability to save enough, or don't have enough income to save enough, both of which seem reasonable criteria off of which to base a lending decision. The parent commenter described a circumstance -- self-employment -- that is wholly unrelated to both poor credit and an inability to save a down payment. You made the leap between the two. We need to end this kind of thinking. > a nice buying opportunity, etc Equal housing laws mean that -- in the absence of very particular circumstances -- any opportunity for this hypothetical student would also be available to more reliable debtors.