Hat tip to JD for shipping this wsj.com article:
After years as the lending market’s undesirables, aspiring home buyers with less-than-stellar credit are being offered home loans again—with some of the same conditions and catches critics say tripped up subprime borrowers five years ago.
According to analysts, a handful of private investment firms have started making home loans to borrowers who fail to meet banks’ requirements, which got tighter post-crash and have largely stayed that way. And for now they are holding them on their books, which is novel. At least two, Athas Capital Group, of California, and New Penn Financial, which is owned by Shellpoint Partners, of New York, are also making jumbo loans, or loans in most parts of the country that exceed $417,000, as the federal government appears to be scaling its support of that market.
The loans are designed to include borrowers with credit scores deemed low by banks’ standards; they also have more-flexible requirements for proof of income. Banks have been too slow to extend credit to such people, the firms say, leaving otherwise responsible borrowers out in the cold—and potential profits on the table. “It’s often a minor detail, why banks won’t approve them,” says Brian O’Shaughnessy, chief executive at Athas Capital.
Banks are following standards set by the market and reinforced by regulators, which focus on avoiding risk and losses with the uncertainty that exists now, says Bob Davis, executive vice president at the American Bankers Association.
The firms say this is far from the subprime lending of the go-go years. While they may embrace slightly riskier borrowers, they require higher down payments, around 40% on average at Athas Capital, compared with roughly 10% for a bank loan, says Keith Gumbinger, vice president at HSH Associates. And while they are willing to be flexible with income documentation, accepting a workplace pay stub or a series of bank statements in lieu of tax-return documents, they still require documentation as proof a borrower can repay the loan. This opens the door to otherwise qualified borrowers who have been foreclosed on, for example, or who may be self-employed or recently unemployed but are now back to work, says Chip Cummings, president of Northwind Financial, a consultant to mortgage lenders.
Critics say the loans are similar enough to the subprime mortgages of old that would-be borrowers should beware. They often have a so-called balloon structure, which requires the borrower to pay the remaining balance after five or seven years, or to refinance. And they are expensive, with interest rates of as much as 13%, the loans can cost more than double the average for bank mortgages. “You’d have to be fairly desperate to take that in the current market,” says Guy Cecala, publisher of Inside Mortgage Finance.
Given the recent economy, that includes a lot of people. With housing prices still so relatively low, many people may want to buy, which analysts say could fuel a boom in this sector.
Also, starting in October, the government is expected to lower the limit on the loans it guarantees to as low as $271,050 in some places, in some cases a drop of almost $100,000. That, too, could open the door for these private financing companies.
“There are a lot of borrowers out there who aren’t being provided for,” Mr. Cummings says. “Private investment firms are filling the gap.”
Let the healing begin.
I saw something today that for the past 2 years FHA financing amounts to about 20-30% of southern CA sales compared to 3-5% from about 2000-2008. Based on leverage I still think low down payments is probably more important to high housing prices than loaning money to credit risks with big down payments. Based on the typical saving rate for Americans it seems like it’s a lot easier to find a person with good credit, decent income, and little money in the bank vs. a person with good income, poor credit and a lot of money in the bank.
Is this the strategic defaulters loan program?
Not bad, 40% down and 13% mortgage, that will sell like hotcakes.
13% … is it 1976 already?
I dont this program is bad at all. It usually never is the front runner when it comes to changes like this.
The broader question, is what happens if this turns out to be successful and starts a whole chain of these albeit with different lending standards?
Thaylor, Jake, et al, let me pose a question to you (and others who are put off by 13%): How much interest would you require on your own personal savings to make an 80% loan against a property.
Home is $500k = You put up $400,000 of your hard earned money. Would you take 4.5%? Curious what number would make people write a check to fund a mortgage….
We invest in commercial mortgages but I won’t disclose the rate we earn so I don’t taint the responses.
“How much interest would you require on your own personal savings to make an 80% loan against a property.”
That depends on the borrower and how I feel about the assessed value of the securing asset.
These guys say up to 13% but I would think they’d have to offer under 10% if they are going to do any volume. Nobody needs a house that bad, and if you are refinancing because you got in a bind, just stop making payments, and stay a while.
Back in the old days when they used to foreclose on people, these guys had a niche market saving houses. Not sure any ‘homeowner’ cares that much about agreeing to any interest rate just to keep their house now.