Does rebranding work? It seems to as mortgage companies rename subprime loans to nonprime loans.
Mortgage lenders are again dipping their toes into the housing market with people who have “less than perfect credit.” Instead of calling housing loans to people with low FICO credit scores and limited incomes subprime loans as they did during the run-up to the financial crisis of 2009, mortgages lenders are now calling these loans “nonprime” loans.
Nonprime loans are for people who may have FICO credit scores as low as 500. (Currently, the average FICO score for an agency-backed mortgage stands in the mid-700 range.) Recent “credit events” such as foreclosures, bankruptcies, histories of late payments, etc., are also acceptable to nonprime lenders.
Carrington Mortgage Holdings, a California-based mid-sized lender, and Angel Oak Mortgage Solutions, an Atlanta based lender that just expanded to the Dallas-Ft. Worth market, are two lenders focusing on nonprime and non-QM (non Qualifying Mortgage) loans.
Rick Sharga, executive vice president of Carrington Mortgage, said, “We’re not going back to the bad old days of ninja loaning when people with no jobs, no income and no assets were getting loans…our underwriting (policies) go back to common sense sort of practices. If you have risk, you offset that risk somewhere else…” Most often, higher risk translates into higher down payment requirements and likely higher interest rates.
Nonprime borrowers with Carrington are able to take out loans up to $1.5M on single-family houses, townhouses and condos. Cash-out refinances are also possible where borrowers tap the equity in their homes up to $500,000.
Angel Oak Mortgage Solutions began offering and securitizing nonprime mortgages two years ago. To date their securitizations total $1.3B.
Angel Oak has several loan programs that target nonprime borrowers, non-QMs, foreign nationals, investors, etc. Each program varies a bit but the bottom line for all is that Angel Oak is focusing on Urban Institute’s estimated 6M borrowers (millennials with student debt and older generations who have experienced foreclosures) who could not or did not qualify for mortgage loans between 2009-2015.
More firms are getting into this nonprime lending sphere as demand for these loans take off. The Urban Institute estimates that 20% of consumers continue to have too low credit scores that disqualify them for obtaining a mortgage in this tight lending market.
Last summer, Fannie Mae relaxed its lending standards for nonprime loans by raising its debt-to-income (DTI or the amount of debt a borrower may have compared to the borrower’s income)) limit from 45% to 50%. As a result, there has been an increase of +100,000 loans via Fannie Mae in just 7 months.
The industry hopes, of course, that nonprime and non-QM lenders will focus on better underwriting standards. No one wants any industry lending entity to take risk to the former subprime levels, no matter the rebranding of now nonprime loans.