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The Mortgage Professor: Subprime Loans Back, and They’re U.S.-Insured

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By Jack Guttentag

subprime_loan_concept(MCT)—Think subprime mortgages have gone away? Think again. We have a subprime market lurking within the Federal Housing Administration, with features that are eerily similar to those of the private market that went into hyper-drive in the 2000s and collapsed in 2007.

The central features of a subprime market are:

—Expensive marketing directed to borrowers with very poor credentials and few options.
—Liberal qualification requirements that allow some of these weak borrowers to be approved.
—Overcharges, with profit margins much higher than those available on other mortgages.
—High default rates.

The techniques used in the two subprime markets to target potential customers are the same. A letter I received recently described “an event sponsored by a real estate company/mortgage company to help people that have had a foreclosure or short sale get back into a house. We did a short sale on our house about two years ago. While there our qualifications were checked, and a few days later they approved us.” The approval was for an FHA loan. Other than that, this letter could have been written 10 years ago.

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