[REN #504] Non-Prime Loans Replace Subprime

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Subprime loans are making a comeback for people with less than stellar credit. Lenders are offering what are now called “non-prime” loans. They are similar to the subprime loans that brought down the housing market ten years ago, but, due to higher underwriting standards, are supposed to be a much safer product.

For people with bad credit scores, a lot of debt, a nontraditional paycheck, or some other life event, the housing market has looked more like a impenetrable fortress. But, several lenders are now helping these “underserved borrowers” with an alternative loan product called the non-prime loan. As CNBC reports, demand is “soaring.” [1]

We haven’t seen loans like this since the big housing meltdown. The government put strong regulations in place to protect the housing market, and investors lost faith in the securitization of these products. But, with the current high home prices, a tight housing market, and rising interest rates, the number of mortgage originations are dropping and lenders are trying to drum up more business.

Carrington Mortgage is one of the lenders offering loans to borrowers that present a higher credit risk, but, it says, these loans are more carefully underwritten than they were in the past. The company says it is doing this with a more individualized approach to underwriting.

Higher Underwriting Standards

Carrington president Ray Brousseau said, “Not all mortgage companies have the ability to offer loan products in a responsible way to those who don’t fit into the traditional lending environment.” He said, Carrington is able to do this because they manually underwrite each loan. Brousseau said, “We’re able to analyze an individual’s personal history, recognize their needs and responsibly lend to them.” [2]

People who might need a non-prime loan could include students or adults saddled with debt, consumers with low credit scores, people who are self-employed, and those who’ve experienced a recent financial event such as a foreclosure or bankruptcy. But, one of the most important factors in determining a person’s creditworthiness is their payment history. Missing a payment has a big impact on a person’s credit score and it often jeopardizes a person’s ability to get a loan.

Brousseau said, it’s at this point, that his company knows how to work with these borrowers “to help get their loans and keep them in their homes” without returning to the kind of “careless lending that led to the foreclosure crisis back in 2008.”

Non-Prime Clients

Consumers who may qualify for a loan with Carrington can have a score as low as 500 and get a loan for as much as $1.5 million. They can also have a foreclosure, bankruptcy, or history of late payments. But the loans won’t be the same for each borrower. Carrington will assess the risk and may require a higher down payment so borrowers have “more skin in the game.” Those borrowers may also have to pay a higher interest rate.

The Scotsman Guide called it “niche lending” to borrowers with “unique financial situations.” It said, lenders will be more discriminating than they were in the past as they try to prove to investors that mortgage-backed securities are once again a good thing. And, it’s important that these loan originators provide a loan package that is appropriate for the borrower.

Generational Factors

Lenders need to take generational factors into consideration. Millennials will have a short credit history but vast earning potential with few or no negative financial events on their record. They may also have a lot of student debt, and bad memories of what their parents went through during the housing crisis, creating doubt about the underwriting process. The Scotsman Guide said, Millennials need financially friendly products and lenders need to be conservative in providing these loans.

Generation Xers were caught right in the middle of the financial crisis, and many are still trying to repair the damage. The Great Recession forced many Gen Xers into foreclosure. Some lost jobs. Many had homes that were underwater. The Home Affordable Refinance Program helped a lot of borrowers keep their homes, but others lost them and are still unable to get a loan. These new non-prime loan options could help them get back into the market.

To determine whether a Gen Xer should get a loan, The Scotsman Guide said, its important to find out why that individual lost their home. Was it an unfortunate circumstances or bad timing? Or was it due to financial mismanagement? Lenders also need to look at the individual’s ability to place a large down payment, and what they have in the bank as back-up funding. Each case needs to be assessed individually, and loans offered in a way that helps the borrower succeed, not fail.

Baby Boomers already have a special program designed for some members of their generation. It’s called the Equity Conversion Mortgage which is otherwise known as the Reverse Mortgage. That’s when the lender pays the homeowner for the equity in the home as a way to finance retirement. Lenders may need to help the borrower understand that the reverse mortgage will not leave them homeless if they outlive the equity they had in their home when took out that loan.

Non-Prime Lenders

Other non-prime lenders include Citadel Servicing, Angel Oak Mortgage Solutions, Athas Capital, Caliber Home Loans, Northstar Funding, Quicken Loans, JMAC Lending, Green Box Loans, and Oak Tree Funding.

[1] “Non-Prime” Loan Demand Soars: CNBC

[2] Carrington Mortgage Services

[3] Generational Factors: Scottsman Guide

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