President bails out subprime borrowers with refinancing option

What is a subrime loan?

A subprime loan is a type of loan typified by adjustable interest rates or generally high interest rates. Subprime loans usually target people who otherwise couldn’t afford a mortgage or people who want a bigger loan than they would normally qualify for.

McALLEN — A new subprime loan bailout program could help thousands of Rio Grande Valley property owners avoid delinquent mortgages and looming foreclosures.

On Friday, President Bush said the federal government would expand its Federal Housing Administration refinancing program for subprime borrowers with good credit.

Industry experts here say that could grant a much needed reprieve to the Valley, where about a quarter of all existing loans are subprime.

“It will really help out people that are in trouble,” said Lupita Garcia, a broker at South Texas Mortgage in Harlingen.

However, the plan could pose some problem and may offer little more than previously available, lenders say.

The expanded program would allow more homeowners to escape their subprime loans by refinancing into a federally insured fixed-rate mortgage. Another element of the plan would be to increase the publicity for FHA loans and encourage lenders to renegotiate loans with homeowners, Bush said Friday, according to a White House transcript of his comments.

More than 27 percent of all McAllen-area loans are subprime, the highest rate in the country, according to LoanPerformance, a lending research company in California. In Brownsville and Harlingen, the rate is close to 22 percent, the sixth highest in the nation.

Some locally based lenders offered subprime loans, but national firms such as Countrywide Financial and Wells Fargo have underwritten most such loans across the country.

Most locally based lenders already specialize in government-insured loans, such as FHA, Fannie Mae and Freddie Mac mortgages, said Valerie Cardenas, head of the lending department for IBC Bank in McAllen. Those kinds of loans require more stringent income verification and often are smaller than subprimes, but still appeal to low-income borrowers with low credit ratings.

“We weren’t a big player in the subprime market,” Cardenas said. “We’ve always been more driven toward conservative underwriting.”

However, homeowners close to foreclosure aren’t always able to refinance, Cardenas said. She said lenders are skeptical about underwriting loans for individuals who are already delinquent on payments.

Many also note that FHA loans have always been available to low-income borrowers and say that expanding the program won’t provide any new options for borrowers.

“Those loans were available all along,” said Sam Saxena, owner of Rapid Mortgage in Edinburg, who brokered some subprime loans for area lenders, as well as government-insured loans. “FHA is essentially a product that has been around for decades.”

Subprime rates in the Valley are high, but homeowners have managed to avoid foreclosures with a strong housing market. Homeowners who get in trouble can still sell their homes here because home prices have continued to increase.

While some borrowers may be saved by the new bailout program, the plan doesn’t address subprime lending companies, several of which are reeling financially and are straining the overall economy.

“A federal bailout of lenders would only encourage a recurrence of the problem,” Bush said, according to the White House transcript of his comments. “It’s not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

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Kyle Arnold covers business, the economy and general assignments for The Monitor. You can reach him at (956) 683-4410.