Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 8 - The Appraisal Game

In the arena of subprime lending, though the borrower’s ability to repay a mortgage was reviewed, underwritten per the subprime lender’s guidelines, the value of the borrower’s property, the property’s appraised value, played a more prominent role than the borrower’s ability to repay the mortgage.

Subprime lending risk assessment was heavily weighted to what is called the loan-to-value ratio of a borrower’s property.  The loan-to-value ratio is simply illustrated this way.  If you own a home that is appraised at $100,000.00, and you borrow $80,000.00, with your home as collateral, your loan-to-value ratio is eighty percent (80%).  If you borrow $90,000.00 against your $100,000.00 home, your loan-to-value ratio is ninety percent (90%).

Though appraisals have always played an integral part in any mortgage loan application, whether for a prime loan, or subprime loan, the lack of creditworthiness on the part of subprime borrowers made the appraised value of a property in the subprime lending field, much more important than in the prime lending field.  In fact, in the subprime lending field, the appraised value of a property could hold the golden key to make or break a potential deal, and this fact led to the distinct possibility of a property appraisal being manipulated, so the golden key could turn in the lock to release cash which could be dropped into a subprime borrower’s pocket.

Why was the appraisal so integral in the subprime lending industry?  Because subprime borrowers’ loan- to-values, how much they can borrower against their homes, were limited by the borrower’s individual credit score and grade.  If a borrower’s credit score was high, basically 620 or above in subprime lending, they could borrow up to one-hundred percent (100%) of the value of their home.  If the borrower’s credit score was exceedingly low, a credit score of 500 was the cutoff point in subprime lending, they could only borrow sixty-five percent (65%) of the value of their property.  Thus, the lower the borrower’s credit score, the higher the probability an appraisal with a possibly artificially high value would be required to put together a deal that the subprime borrower would be willing to go for.  Remember, the promise of cash in a borrower’s pocket was one of the biggest motivators for borrowers in subprime lending, and if an artificially high appraisal was at times required to make this happen, well, then it could happen.

Posted by on 04/03 at 09:47 AM

Name:

Email:

Location:

URL:

Smileys

Remember my personal information

Notify me of follow-up comments?

Submit the word you see below:


Next entry: Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Previous entry: Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

<< Back to main