Subprime housing market not what it used to be

Not so long ago, lenders gave out mortgages to potential homeowners without doing their due diligence. Often, no down payments or documentation were needed. As a result, the global economy suffered and the housing market crashed.

There was the Adjustable Rate mortgage (ARM) with a low interest rate for a couple of years – then it could suddenly go up as much as three times the original payment. Banks decided this was acceptable because they figured the customer would refinance before the balloon burst, but this didn’t always happen. Meanwhile, banks also went to market with NINA products (No Income, No Assets) and “liar loans” that were based on unproven credit scores and income statements.

Now that we’re in a period of recovery the subprime housing market is not what it used to be; many banks aren’t willing to take the same chances they once did. Loans made to today’s biggest loan risks are called nonprime – instead of the term they were once called, “subprime” (source).

The differences don’t stop there. These new-but-not-so-new nonprime loans usually require a substantial down payment, as much as 30 percent, as investors attempt to protect their investments. So while their loans don’t conform to standards because they are lacking in their credit rating, investors still want to lend money – so they are doing what they can to safeguard themselves.

Because the majority of the subprime (nonprime) candidates can’t produce that much of a down payment, the number of these loans is a mere drop in the bucket when compared to the subprime loans of years past that caused the housing boom (and later the collapse). In fact, Inside Mortgage Finance says that $3 billion in nonprime mortgages were made during the first nine months of 2013. Compare that to 2005, when the number of subprime originations catapulted all the way to $625 billion.

As time passes, will investors and banks begin to give in and take on more risk? For now, no – but that is always subject to change. Until it does, lenders have two options: they can either hang onto the loans, or they can sell them to private equity firms until they can begin offering mortgage-backed securities.