WASHINGTON – The growth in subprime lending to credit-impaired borrowers has opened the door to home-ownership for many consumers that would have otherwise remained shut. But subprime lending to consumers with credit problems has also indirectly given rise to two mortgage processes in the U.S. – one that leaves borrowers with strong credit histories feeling confident and satisfied, and a second in which families with credit problems can obtain mortgages but at higher prices, with less confidence and with general dissatisfaction about the mortgage process. That was the key finding in Fannie Mae's 2001 National Housing Survey, conducted by research firms Peter D. Hart Research and Coldwater Corp. and based on interviews with 1,001 randomly selected adults, with an oversample of 303 credit-impaired homeowners. The survey results weren't without some good news – 62% of respondents agreed with the statement that it is a good time to buy a home because interest rates are low. In addition, more homeowners (29%), bolstered by a drop in mortgages rates from what they were over the past several years, indicated it's a better time to buy than said so in last year's survey (19%). In fact, the survey found that the desire to own a home is so intense among American consumers, many of them are willing to go to extraordinary lengths to be approved for financing. Of the credit-impaired borrowers surveyed, 42% said they were paying interest rates between 10.5% and 14%, compared with about 7% for conventional financing. In addition, only 34% of credit-impaired borrowers said they were confident they got the best mortgage deal possible, compared with 68% of conventional loan borrowers. Still, the survey data showed that while all homeowners are split on whether lenders take advantage of credit-impaired borrowers or help them, 49% of credit-impaired borrowers said lenders help consumers like them, including 48% of credit-impaired borrowers paying more than 10.5% interest. But credit-impaired borrowers ultimately choose a lender because they believe they have few borrowing options, not because of the lender's reputation or because they trust the lender is offering them a good deal on a loan. Only 11% of credit-impaired borrowers said their mortgage lender offered the best interest rate they qualified for. So why do credit-impaired borrowers select a particular lender? Because, the survey data shows, they believe the lender approves most loans – 15% of credit-impaired borrowers cited this reason compared to 4%of all homeowners. Not surprisingly, many credit-impaired borrowers report they are dissatisfied with the mortgage process. Of the 45% of credit-impaired borrowers who said their mortgage interest rate exceeded 10.5%, 81% said they were dissatisfied with their loan rate. Among all credit-impaired borrowers, 58% said the lender controlled the mortgage process. That compares to 46% of all homeowners who indicated that they themselves controlled the process. Forty-three percent of credit-impaired borrowers said they'd have to pay a prepayment penalty if they refinanced their loan, compared to 11% of all homeowners; 21% of credit-impaired homeowners said they were informed of a balloon term on their loan, compared to 11% of all homeowners; and 39% said their lender told them their interest rate would go up in a number of years. Only 44% of credit-impaired homeowners said they would be very or fairly likely to return to the same lender if they needed another mortgage loan, compared to 63% of all homeowners. Additionally, 63% of credit-impaired borrowers said finding a mortgage lender they can trust would be an obstacle if they wanted to buy a home now. That's not necessarily bad news, said CUNA's Chief Economist and Senior Vice President Bill Hampel. "Subprime lending to consumers with impaired credit is a better alternative than providing them with no credit at all or worse, driving them to predatory lenders," he said. "The fact that subprime lenders are meeting the needs of credit impaired borrowers and not sending them to predatory lenders is a good thing," Hampel added. Hampel noted the comments of Fannie Mae Chairman and CEO Franklin Raines on the study's findings – "The results raise several issues for the entire mortgage industry to address, and the central question is whether all consumers are enjoying their basic right to the lowest-cost mortgage for which they can qualify." "I'm not sure everyone has the right to a low-cost mortgage," Hampel offered. "Raines' statement begs the question, `If someone doesn't qualify for a low-cost mortgage, should they still get one?' "I think it's more appropriate that people have access to the lowest possible rate for a mortgage that they qualify for," Hampel stated. "Every lending process should be discriminatory between those loans that are likely to be repaid and those that aren't," he continued. "That's the purpose of underwriting. In a simple world, it would be easy – either you'd make the loan or you wouldn't. The subprime lending world is the gray area between those loans that are certain will be repaid and those that won't. There are a lot of consumers who fall in between and should have the chance at borrowing. This is the group the subprime lenders serve." Because the subprime lending market tends to be less competitive, consumers in this group are likely to feel they have less borrowing options and are more vulnerable. "But for someone who has a significant concern they'll be turned down for a conventional loan, their mere acceptance for a subprime loan is most important," said Hampel. "The existence of a subprime lending market that is non-predatory is a good thing," said Hampel. "The more active and competitive the subprime lending market that's attempting to provide credit to marginal borrowers, the better off these consumers will be." -

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