Subprime mortgages – which were blamed for sparking the last housing crisis – are reappearing, but this time they're dubbed "nonprime" loans. This lending option, which carries new quality standards, is growing for buyers with damaged credit.
California-based Carrington Mortgage Services is one company expanding its nonprime loan offerings.
"We believe there is actually a market today for people who want to buy nonprime loans that have been properly underwritten," Rick Sharga, executive vice president of Carrington Mortgage Holdings, told CNBC. However, he says, "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."
Carrington Mortgage Services, which plans to manually underwrite each loan, will qualify borrowers with FICO credit scores as low as 500. Borrowers could qualify for loans of up to $1.5 million on single-family homes, townhomes or condos. The lender also will qualify borrowers who've had recent problems reported on their credit histories, such as a foreclosure, bankruptcy or a history of late payments. But borrowers who are at higher risks will be required to make a bigger down payment, and the interest rate on the loan will be higher.
"What we're talking about is underwriting that goes back to common sense sort of practices," Sharga says. "If you have risk, you offset risk somewhere else. We probably are going to have the widest range of products for people with challenging credit in the marketplace."
Other lenders also are getting into the nonprime space, including Angel Oak and Caliber Home Loans – and more than 80 percent of Angel Oak loans are nonprime.
"We believe that more competition is positive for the marketplace because there is strong enough demand for the product to support multiple originators," says Lauren Hedvat, managing director of capital markets at Angel Oak. "Additionally, the more competitors there are, the wider the footprint becomes, which should open the door for more potential borrowers."
Source: "Subprime Mortgagees Make a Comeback – With a New Name and Soaring Demand," CNBC (April 12, 2018)