A few lenders are offering loans to borrowers with damaged credit. But, unlike during the boom, they are asking for big down payments and lots of documentation.
They’re ba-ack.
We don’t mean ghosts. But some may see the ghosts of the real-estate crash past in the reappearance of subprime loans.
According to the Los Angeles Times, more lenders are beginning to offer mortgages to customers with lower credit scores.
But these are not the subprime mortgages that proliferated during the boom, which were bundled into securities and sold on Wall Street. Since the lenders had no risk, they weren’t so careful about vetting the borrowers.
Instead, the new subprime lenders are offering mortgages to buyers with credit problems, but they are asking for higher down payments, charging higher interest rates and asking a lot of questions. As the Times writes: “In other words, a borrower’s collateral matters, down payments matter, income and ability to pay matter.”
In Temecula, Calif., Michele and Russell Poland wanted to get a house in a good school district now, since their son had turned 5. But their credit had taken a big hit from a business bankruptcy and a home foreclosure.
To buy a house, they were willing to make a 35% down payment, pay $10,000 in fees and accept a 10.9% interest rate, about three times the rate paid by borrowers with top credit.
“It was expensive, but we think it’s worth it,” Russell Poland told the Times. The couple hopes to be able to refinance into a conventional loan within a year.
The subprime business is still a small percentage of the home loan business, less than 0.5% of the loans originated last year. In contracts, more than one-third of the mortgages made in 2005 and 2006 were subprime or “Alt A,” meaning borrowers did not have to document their incomes, according to the Times.
The lenders who are moving back into this market see opportunities to give loans to people who can pay them, despite their lower credit scores or past foreclosures.
“There are a lot of borrowers who can make a big down payment, document that they have the income to pay the loan and have a good recent job history — but have a credit score that would make it impossible to get a loan,” says Rick Sharga, executive vice president of Carrington Mortgage Holdings, which is one of the companies that is getting into subprime lending.