Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 3 - Vanilla Ice Cream, or Big Chicken Dinner?

When I first began working in the mortgage industry, in 1987, I strictly worked with “A” (prime) borrowers who were looking to purchase a home.  This was also true for the majority of “A” paper mortgage lenders in 1987.  The borrowers we worked with on the “A” side of the mortgage business were borrowers with good credit, decent jobs, and in most instances, the borrowers also had at least ten percent (10%) of the value of the home in cash as a down payment.  The vast majority of mortgages written for these “A” borrowers were thirty (30) year, fixed rate mortgages, which were called “vanilla ice cream” mortgages.

This does not mean that there were not borrowers out there in 1987 that had bad credit.  Nor does this mean that there were not mortgage lenders out in the marketplace that wrote “B,” “C,” and “D” paper (subprime) mortgage loans at this time.  “B,” “C,” “D” paper borrowers, and lenders, were out there in the marketplace in 1987, though the subprime lenders willing to risk lending to subprime borrowers in 1987 were operating on the margins of the mortgage industry, and the number of subprime lenders doing business in 1987 was minimal.  “A” (prime) paper mortgage lenders just did not, or would not, work with these subprime lenders.  We called these “B,” “C,” “D” mortgages (subprime loans), and borrowers, “big chicken dinners,” for reasons which will soon be related.

In 1987, the overwhelming perception of “B,” “C,” “D” (subprime) mortgage lenders, held by “A” paper lenders, was that subprime lenders were “sharks,” preying on the financially unfortunate. There was a distinct, slimy stigma associated with subprime lenders, and most “A” paper lenders wanted nothing to do with these subprime lenders, or the borrowers they tended to feed on.  And why would they?  The “A” paper side of the mortgage business was more than profitable, with gross margins per loan averaging around three and one-half percent (3.5%).

Posted by on 03/29 at 05:29 AM

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