Subprime Mortgage Loans Make a Comeback
With a New Name and Soaring Demand ‘Nonprime’
Subprime mortgages—which were blamed for sparking the last housing crisis—are reappearing, this time being dubbed “nonprime” loans. This lending option, which carries new quality standards, is growing for buyers who have damaged credit.
Carrington Mortgage Services is one company expanding its nonprime loan offerings. “We believe there is actually a market today for people who want to buy nonprime loans that have been properly underwritten,” Rick Sharga, executive vice president of Carrington Mortgage Holdings, told CNBC. “We’re not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans.”
Carrington Mortgage Services, which plans to manually underwrite each loan, will qualify borrowers with FICO credit scores as low as 500. Borrowers could qualify for loans of up to $1.5 million on single-family homes, townhomes, or condos. The lender also will qualify borrowers who’ve had recent problems reported on their credit histories, such as a foreclosure, bankruptcy, or a history of late payments. But borrowers who are at higher risks will be required to make a bigger down payment, and the interest rate on the loan will be higher.
The outsized demand from borrowers with more debt as well as demand for nonprime mortgages in the private sector show just how many borrowers today would like to become homeowners but are frozen out of the mortgage market.
Millennials, the largest homebuying cohort today, have much higher levels of student debt than previous generations. Members of older generations who went through foreclosures during the housing crisis or other hits to their credit are still struggling with lower FICO scores.
In addition, credit tightened up dramatically. In fact, between 2009 and 2015, tighter credit accounted for just more than 6 million 'missing' loans, according to research by Laurie Goodman at the Urban Institute. These are mortgages that would have been granted under more normal historical underwriting standards.
The rebirth of the nonprime market is focused on these missing mortgages. The hope is that the industry will also focus on better standards of underwriting and not take risk to the levels it once did, levels that resulted in disaster.
“What we’re talking about is underwriting that goes back to common sense sort of practices,” Sharga says. “If you have risk, you offset risk somewhere else. We probably are going to have the widest range of products for people with challenging credit in the marketplace.”
Other lenders also are getting into the nonprime space, including Angel Oak and Caliber Home Loans; more than 80 percent of Angel Oak loans are nonprime. “We believe that more competition is positive for the marketplace because there is strong enough demand for the product to support multiple originators,” Lauren Hedvat, managing director of capital markets at Angel Oak, told CNBC.
“Additionally, the more competitors there are, the wider the footprint becomes, which should open the door for more potential borrowers.”
Source: CNBC (April 12, 2018)
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