Subprime Mortgage Lending Underwriting Standards

A

Subprime mortgage lending refers to the practice of providing loans to borrowers who may have a history of credit problems, low credit scores, or high levels of debt. The underwriting standards for subprime mortgage lending are designed to ensure that the borrower has the ability to repay the loan and that the lender is not taking on excessive risk.

Option A: The borrower's debt-to-income ratio should include the borrower's total yearly housing-related payments as a percentage of gross monthly income.

This means that the lender should consider the borrower's ability to make monthly payments on the mortgage loan in relation to their income. The lender should take into account the borrower's total yearly housing-related expenses, including principal, interest, taxes, and insurance, and compare that to the borrower's gross monthly income. This helps to ensure that the borrower has enough income to cover their monthly housing-related expenses and reduces the risk of default.

Option B: Institutions should have a clear policy governing the use of risk-layering features, such as reduced documentation loans or simultaneous second lien mortgages.

Risk layering refers to the practice of combining multiple risk factors, such as low credit score and high debt-to-income ratio, in one loan. Reduced documentation loans, which require less documentation of the borrower's income and assets, and simultaneous second lien mortgages, which allow the borrower to take out a second mortgage on the same property, are examples of risk-layering features. Having a clear policy governing the use of these features helps to ensure that they are used appropriately and that the lender is not taking on excessive risk.

Option C: Stated income and reduced documentation loans to subprime borrowers should be made only if there are clear, documented mitigating factors.

Stated income and reduced documentation loans allow borrowers to state their income or provide less documentation of their income and assets, respectively. These types of loans can be more risky because they may not accurately reflect the borrower's ability to repay the loan. Therefore, they should only be made if there are clear, documented mitigating factors, such as a high credit score or a large down payment, that reduce the risk of default.

Option D: Mitigating factors should be present when risk layering features are combined in order to support the underwriting decision and the borrower's repayment capacity.

This option refers to the importance of mitigating factors in the underwriting decision when risk layering features are combined. Mitigating factors are any factors that reduce the risk of default, such as a high credit score or a large down payment. When risk layering features are combined, it is important to have mitigating factors present to support the borrower's ability to repay the loan and to reduce the risk of default.