Bad Credit Mortgage Refinance

Times are tough. Very few people alive today have faced a more challenging economic condition than the one we face today. Official unemployment, as measured by U-3, is rising nationwide and will soon approach 10%. Unofficial employment as measured by U-6 is nearly twice as bad. In times like these one would expect it to be nearly impossible to get a home loan if you have bad credit. Unfortunately this is not the case.

Our current economic situation is a result of nearly 40 years of credit expansion in the United States. Beginning in 1971 when Nixon took us off the gold standard and the Federal Reserve became increasingly free to manipulate the cost of credit via the federal reserve rate, credit expansion in this country experienced an unparalleled boom. In 2002 then Federal Reserve Chairman Alan Greenspan lowered the Federal Reserve Rate creating a very cheap cost of capital. This cheap cost of capital allowed banks to lower the mortgage rates they could provide to their customers and allowed access to capital for bad credit borrowers. This combined with an increasingly expanded role of the GSE’s, Fannie and Freddie Mac, and the creation of a new financial product called Securitization allowed banks and other mortgage participants to continually increase the bad credit home loans they gave out.

Beginning in 2007 these bad credit borrowers began defaulting on their home loans. These defaults caused a downward spiral as each foreclosed property added supply to the gluttonous housing market. The increasing supply caused prices to fall pushing more and more borrowers, many of whom had put little to no money down in a process called sub-prime, into negative equity. Once in negative equity bad credit borrowers made rational decisions to default on their debt, hurting their credit score, but saving their cash flow. This process is still ongoing despite attempts by the Obama Administration to stop the downward spiral.

One would think or at least hope that in the current environment bad credit home loans would have ceased and in many respects they have. Major banks including Wells Fargo and Bank of America now do detailed diligence on borrowers including job and income verification checks as well as detailed credit check. Furthermore, they are requiring a minimum of 20% down in order to purchase a house. However, public institutions are still continuing many of the same hazardous lending practices that contributed to the housing debacle. Specifically, the FHA is currently loaning money out to dubious borrowers with as little as 3.5% down. Additionally, for borrowers who don’t have the 3.5% down the FHA is allowing them to use the recently enacted $8,000 tax credit as their down payment. While the FHA is pursuing these policies in order to attempt to artificially stimulate demand for housing this is the exact same course of action that caused the boom in the first place. These actions must stop for the system to recover.