As part of Freddie Mac's 20 billion dollar commitment to buy sub-prime loans, the company has "strongly suggested" that sub-prime lenders start collecting escrows for taxes and insurance. I think this is an important step to take for lenders but an even more important one for consumers. How often have we, as mortgage professionals, worked with a sub-prime borrower who has had enough money to escrow when they purchased a home? To follow that up, when sub-prime borrowers refinance and don't have escrows, how often are their taxes paid currently? The answer to both, in my experience, is not often!
Sub-prime borrowers are far more likely to lack the financial discipline necessary to set aside funds for taxes and insurance if they aren't included in their monthly payment. This is most likely why they are sub-prime borrowers to begin with!
The primary outcome to the tightening of the sub-prime market is not to protect lenders or Wall Street. It's also not to weed out the weak in the mortgage industry. Although these are positive effects as well, the most important outcome is protecting homebuyers. Going forward, everyone who purchases a home is going to be as well equipped to do so as possible. Sub-prime borrowers are often well suited to home ownership and should, in fact, be homeowners.
Sub-prime borrowers with money down and enough funds to escrow are likely as good risks as many prime borrowers, especially when their higher interest rates are factored in. Like prime lending, reserve requirements are not a terrible idea either. Sub-prime was conceived as loan products for those who were just outside of prime and, over time, stretched beyond good sense or reason. Now that things are coming back to where they should be, lenders, their investors and, most importantly, consumers are going to be much better off.