Housing markets have come a long way since the devastating housing crisis hit. Today, according to the latest CoreLogic Home Price Index for the US, 6.2% of all homes with mortgages were underwater with negative equity as of December 2016. In 2010, 25% of all homes with mortgages were underwater.
Let’s not let this great news go to our heads, however. Eyes wide open continues to be the watchword, not Stanley Kubrick’s “Eyes Wide Shut.”
Subprime lenders are making a come back. Subprime lending or, preferable to those in the business, “nonprime” lending is currently on course to produce $10B this year. True, $10B is just a sliver of the $1.6T home loan market but this slice is rapidly growing.
Fitch, the credit rating agency, anticipated an increase of $2B in the issuance of nonprime mortgage backed securities (MBS) in 2017 but that figure has already topped $3B in less than eight months.
Economists are now worrying that the same atmosphere that fed the housing crisis 10 years ago may cause another such crisis today. This type of atmosphere includes rampant demand for yield among investors, skewed Wall Street incentives and an administration intent upon relaxing or eliminating regulatory restraints and policies.
Veteran underwriters of subprime lending are emerging…underwriters such as Dan Perl, now 68, who went surfing in Baja in April, 2007 and stayed until now…underwriters such as Kyle Gunderlock, 39 years old, who used to be the vice president of sales at Perl’s old firm and is now president of a new subprime lender called the Citadel Servicing Corporation.
Perl and Gunderlock say that they as specialist lenders are performing a needed service for the “world’s largest economy” composed of people who are self employed or living on variable incomes…people who could not check the boxes required to qualify for a loan through Chase, Wells Fargo and other “mainstream” banks. Julian Hebron, the head of sales at RPM Mortgage in Alamo, CA, says, “Making credit available to borrowers who are subprime is national policy…and an important part of economic growth. It’s untrue to call it a scourge.”
Call subprime or nonprime lending what you will…it’s returning. And chances are that lenders with names you know such as Chase and Wells Fargo, not just names you don’t, will throw their hats back into that ring to get a piece of the pie.
Eyes Wide Open.
