My name is David Reed and I’ve originated, processed and closed sub-prime loans with interest rates as high as 11%. I did this with regularity and with full knowledge of the consequences of my actions.

A few years ago, Texas voters passed Proposition 12 on the November ballots way back in 1995. Proposition 12 allowed for homeowners to refinance their homestead and pull cash out for two distinct reasons: 1: To settle equity between spouses in instances of divorce and two: To pay off Federal Tax Liens. So what? At the time, these were the only times Texas homeowners could tap into their primary residence without selling their home. Some really serious “cash out” restrictions here, folks.

Being the entrepreneurial person that I am, I immediately researched public records to locate homeowners who had the unfortunate instance of a Federal Tax Lien being placed on their property. I did this for the sole purpose of funding a mortgage loan so I could support my family while simultaneously getting someone out of some potentially serious trouble.

As you might imagine, people who find themselves in trouble with the IRS for any length of time may also experience some credit problems due to these tax liens. The vast majority of these unfortunate folks owned businesses during an economic downturn, had to close their operations owing huge sums of money to Uncle Sam. It wasn’t necessarily financial mismanagement, it was the fact that there was no more money coming in. Their customers up and left town.

Then came the delinquent tax bills, late payments, and in many cases bankruptcies and foreclosures. Shortly thereafter their credit rating went south. Way south, like in Antarctica. Because their credit was so damaged by the tax liens, it was impossible to find any lender who would loan them money of any sort to pay off their tax bills. Yes, by paying off the tax bills with a cash out refinance it would dramatically improve their situation and get them back on track, but no mortgage lender would take a gamble on someone with tax liens, late payments and collection accounts outstanding.

Except for Sub-Prime lenders.

After I mailed some information to these homeowners explaining the new laws surrounding cash out loans to pay off Federal tax liens, the response was overwhelming. I soon found that almost 100% of my mortgage production was subprime.

For a while it seemed only too easy. Go to the courthouse, find names and addresses of newly filed tax liens, send them a letter and close the loan. Yes, the rates were higher. They should be. That’s how lenders offset their risk of lending money to those with negative credit. But these rates were significantly lower than the penalties and interest they were paying on their tax liens and now they had tax-deductible mortgage interest instead of federal tax penalties and interest. But soon into my new found venture I began to wonder if in fact what I was doing was the right thing. You know, was I indeed taking advantage of people in an unfortunate position for personal financial gain? I even recall having a heart-to-heart talk with my boss at the time wondering aloud if I should stop what I was doing. But because it was so new to my company and new to me there was no immediate answer.

I got my answer about two weeks later in the form of a note card mailed to my office.

“Dear David- My wife and I cannot thank you enough for your help. Without your confidence in us to repay our new mortgage we would have never been able to pay off our tax liens. Now, we can start again, and can look forward to the future instead of being afraid of it.”

My question was answered.

Subprime lending doesn’t comprise much of my lending these days, although I’ll still close a subprime loan on occasion. But I will say this: subprime lending has gotten a black eye from a variety of well-intentioned legislators and consumer groups. Yes, rates for subprime loans are higher than for those with the best credit, but to label them “predatory” for that reason alone is simply not fair. There are Predatory loans and there are subprime loans, one doesn’t necessarily mean the other. Without the subprime lending industry, an entire class of Americans would find no help in home ownership, when it is sometimes needed the very most. Putting them out of business is a grave mistake.

Published: December 6, 2002

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.