The Difference in ‘Nonprime Loans’ Standards Today Compared ‘Subprime Loans’ from the Housing Crisis in Pekin, IL

The Local Records Office notes while all loans are not the same, borrowers in Pekin, Illinois at higher risk will need a higher down payment and will most likely have higher interest rates. Nonprime Loans are expanding mortgage options, with subprime mortgages that were blamed for sparking the housing crisis –are reappearing and being dubbed “nonprime” loans. This lending option now carries new quality standards and is a growing option for the buyers with damaged credit. A subprime loan is essentially where borrowers that are considered risky to lenders can receive financing for home mortgages through subprime loans, though, the loan generally carries a higher interest rate.

While a California-based Carrington Mortgage Services, a midsized lender has just announced an expansion into the space, of offering loans to borrowers, “with less-than-perfect credit,” Carrington will originate and service the loans, but will also securitize them for sale to investors.

“We believe there is actually a market today in the secondary market for people who want to buy nonprime loans that have been properly underwritten,” explained Rick Sharga, the executive vice president of Carrington Mortgage Holdings. “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.”

Other companies, such as Angel Oak began offering securitizing nonprime mortgages more than two years ago and have done six nonprime securitizations so far. While it recently had finalized its biggest securitization yet – $329 million, compromising 905 mortgages, at an average amount of $363,000, with more than 80% of loans that are nonprime.

It is merely, becoming a competition that is positive for the marketplace because there is a strong enough demand for the product to support multiple originators, says Lauren Hedvat, a managing director with capital markets at Angel Oak.

Meanwhile, big banks are also getting into the game, investing in the securities and funding the lenders, according to Sharga.

As our economy improves, and rents are continuing to rise, there are more Americans looking into becoming homeowners, but scars from the Great Recession still stand in the way. And one-fifth of the consumers today have very low credit scores, often disqualifying them from obtaining a mortgage in today’s tight lending market.

And while some view nonprime loans coming to the surface as serious trouble lying ahead, on the contrary, specialist lenders in this area view this as performing a vital source for the world’s largest economy

By “making credit available to borrowers who are subprime is a national policy and it is an important part of economic growth,” explains Julian Hebron, the head of sales at RPM Mortgage in Alamo, California. “It’s untrue to call it a scourge.”

Though what is worrying to economists is the feeling we are on a slippery slope; and the same forces that fed the crisis last time around –rampant demand for yield among investors had skewed the incentives on Wall Street and the government relaxes regulatory restraints- could feed one another.

So what is the difference between the subprime mortgages in 2008 to non-prime mortgages today?

Subprime Mortgages (past) – In 2008, the average credit score in order to qualify for a subprime mortgage was a 580. And many cases, there was no income documentation required at all! Another component –old subprime mortgages –someone with a low credit score, and limited income verification could get a mortgage with very little for their down payment!

Non-Prime Mortgages (present) –2017-2018, the average credit score for a non-prime mortgage is 660. Also, income documentation is always required for a non-prime loan. Some will be glad to know there are alternative methods to verify your income (ie. using bank statements to prove your income).

With the rebirth of nonprime market focused on missing mortgages, the hope is the industry will focus on better standards for underwriting and not take risks the levels it once resulted in disaster.

Back-in-the-days before the mortgage meltdown and the Great Recession, these non-traditional loans were characterized as a mix between sub-prime loans and Alt-A loans. In Today’s market, they are characterized as non-prime loans, according to Guy Cecala, the CEO of Inside Mortgage Finance.

And those olden days of zero-down loans with a bunch of other foul features including prepayment penalties and payment shock as soon as the prepayment penalty expired. “Down payment is most important criteria at the end of the day,” said Cecala.

So while having bad credit is not the same thing as having a bad –unreliable — person, Dustin McKissen the Founder and CEO of McKissen + Company further touches on the subject that borrowers simply end up with less-than-prime credit scores for all sorts of reason, and some are just beyond their control.

And while credit agencies have made recent changes to factor medical debt into a credit score, it is more than half of all the debt that appears on credit reports in the United States is from medical expenses and are holding people back from becoming homeowners

Research consistently has shown that people of color are disproportionately targeted for predatory loans and other risky financial products, making bad credit nearly inevitable. That is one of the reasons why more than 20% of African-American borrowers have credit scores of less than 620, compared to just nearly over 5% of non-Hispanic white borrowers. And one-fifth of all consumers have reported low credit scores because of the lingering impact of the Great Recession.

In other words, whether you decide to call them non-prime or subprime, there is a place in the economy for mortgage loans targeted for borrowers with less-than-perfect credit scores. Or, at least there is when you care about a housing market that does not perpetuate multi-generational economic insecurity. However, The Great Recession taught us (or should have taught us) there is a place for nonprime/subprime mortgages in the center of an economic disaster.

As McKissen further describes nonprime/subprime mortgage as just a tool and that, like any tool, can be used for good and bad.

McKissen says, “the problem isn’t the mere existence of subprime mortgages. The problem is our tendency to let greed turn a good idea into a really bad one. No matter what you call them, if subprime/nonprime mortgages are an inevitable part of the housing market, they need to remain a tightly regulated tool designed to give otherwise reliable borrowers with low credit scores a second, or in some instances, a first chance–and not a way for Wall Street to engage (again) in a temporary and ultimately destructive cash grab.”

And these lenders that offer these loans compared to before when the financial crisis never provided backup are much more rigorous, says Hickey.

What would I need in order to qualify?

To qualify, you will need a credit score of 680, a down payment from 20%-30%. You will also need to produce statements showing 2 years of regular bank deposits, proving your earning power and enough easy-to-liquidate assets to cover a year of mortgage payments. And you will pay a rate of 6% to 7%, plus one or two “points,” compared with less than 4% interest and no points, for a conventional 30-year mortgage. And you must allow two months for the loan to close since investors review deals individually.

The Local Records Office suggests that homeowners should also be more aware of what they are getting into. While your portfolio may help you qualify, do not be lulled into thinking you can easily tap it to pay your mortgage. After all, when the economy turns south and your stocks might go down the same time your business is flagging. “You need to make sure you can afford the house in a bad year, not just in a good year,” rationalizes Greg McBride, the chief financial analyst at Bankrate.com.