Tuesday, April 30, 2013 - Article by: Nevin Williams - Sierra Pacific Mortgage -
I read an interesting article yesterday regarding subprime loans coming back into the market place. After the 2008 housing crisis the word subprime mortgage carried a negative tone because what was once a good option for responsible people with a one time event that affected their credit was turned into a "loan to anybody in any situation". The abuse of this product gave it a bad reputation.
What exactly is a subprime mortgage? It is a mortgage product tailored to applicants that cannot meet traditional loan guidelines imposed by Fannie Mae and Freddie Mac. In the past, these mortgage products carried not only higher interest rates but also carried less favorable terms like pre payment penalties. As a result of some lenders offering these loans in cases where they shouldn't have has left many with the opinion that subprime mortgages are bad.
Subprime mortgages are not bad. They were tailored to allow people ample time to recover from an event that damaged their credit. For an investor to be willing to take the risk there had to be a higher reward hence the higher interest rate. Great example is someone who's credit was ruined from a health event that caused them short term financial hardship. After the hardship they need 2 to 3 years to rebuild their credit. This is where the 2 year and 3 year fixed rate products made sense. At the end of the two or three years the homeowner could refinance into a better loan. What didn't make sense were no income / no asset loans up to 95% loan to value but that is a different discussion altogether.
Currently, Fannie Mae & Freddie Mac (GSE) guidelines are showing little to no change in their strict requirements. We are however seeing private lenders enter the market and offer more aggressive products which would never be allowed by the GSE but are still sensible and pose little risk. Most of this money for non agency loans is coming from Insurance companies.
Large banks have recently been selling huge chunks of their mortgage backed securities portfolios to free up cash to buy loans from these private lenders. It could be that they are watching the insurance industry reap healthy profits from their common sense approach to lending and want a piece of the action.
The Federal Reserve has made it clear that they will continue to increase the cost of Government insured loans to attract private lenders back into the market place. I believe this is now happening. I also think we would have a lot more products available right now if it weren't for the implementation of the CFPB which now regulates lenders much like the SEC regulates stock traders.
This oversight by the CFPB has many in the industry scared to make a mistake or to misinterpret the laws and get hit with fines. Until the CFPB issue gets settled I think more aggressive products will slowly trickle back into the market rather than flood the market even though there is growing investor demand for these slightly riskier products.
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