Sub Prime Loans: What Was Really Happening

Previously on my blog I have written about the sub-prime mortgage crisis and what it involved. However, I have been surprised by the details of an article in the Daily Mail in late March which indicates who was hard hit by the sub-prime mortgage scandal. It is not, as I had thought (and I suspect most Brits thought too) people who already had mortgages who were lured into special deals that reduced monthly mortgage payments and then lifted them up sharply. No it was those people who did not have a mortgage at all and with bad credit ratings who were offered loans to live the American dream of owning a property. Unlike in the UK, there are, apparently, no controls on who sells mortgages to (in this case) often black or Hispanic families and the article mentions in particular a Mr Mark Kellogg “a slick young black entrepreneur who branched out from selling fast food to become a downmarket mortgage broker with an easy line in patter and an eye for the main chance”. He sold “liar loans” or “no-doc loans” because borrowers could simply invent a job and income to get the amount of money they needed.

Never having enjoyed the privilege of borrowing before, those who were lured to borrow with wild promises didn’t think to read the small print. It stated that “the interest rate would start high at, say, 9% (back then 4 points above the Fed rate) and soar ever higher reaching as much as 13% or 14%.” No wonder US investment banks were able to “slice and dice” this sort of mortgage and sell it on to institutions eager for higher returns.

At least in the UK we regulate our mortgage brokers although rumblings in the jungle suggest that falling house prices are going to find out people who took out “liar loans”. In this country they are called “self-certified loans”. With them there is no need to produce any evidence of income but the amount lent will be a lower percentage of the value of a property than a mortgage offer to an employee. On the other hand a person only has to produce one payslip to count as an employee for mortgage loan terms. That laxity is stoking up problems.

If you would like a copy of the excellent Daily Mail article, please e-mail me with your snail mail address.