Subprime Mortgages Reinvented as Near-Prime and Non-Prime Options
Subprime mortgages sometimes carry a negative connotation because they are largely associated with the Financial Crisis in 2007 and 2008. However, subprime lending, now rebranded as near-prime and non-prime, can benefit many borrowers who experienced a credit event and are looking to finance a home. In the past decade, subprime mortgages had mostly dropped off, but Financial Times reports that subprime mortgage bond issuance has doubled from the first quarter of 2017, $666 million, to the first quarter of 2018, $1.3 billion. Why is the demand for near-prime and non-prime mortgages on the rise again?
Non-prime lending gives mortgage access to borrowers who have credit scores as low as 500 or have experienced a recent credit event like a foreclosure or bankruptcy. Typically, when the borrower is a higher-risk, with a low credit score or recent credit event, they will need to offset the risk with a larger down payment.
Freddie Mac, Fannie Mae, and Ginnie Mae have refused to insure non-prime mortgages since the Financial Crisis. However, some specialty firms and other investors are starting to purchase non-prime bonds. CNBC reports over one-fifth of Americans have credit scores that are too low to obtain mortgage financing, hurting their chances of building wealth in an appreciating asset like a home.
According to the Federal Reserve, the US economy is in its ninth year of economic expansion. As laws enacted after the Financial Crisis, like Dodd-Frank, start to adapt to today’s economic conditions, non-prime mortgages may again find a niche in the mortgage market. With Fannie Mae relaxing its lending standards for prime loans, by raising its debt-to-income ratio and lowering minimum credit scores, the mortgage industry is evolving to meet buyer demand and a wider array of financial profiles. Fannie Mae’s chief economist Doug Duncan explained the changes, “we got a bigger response than we thought we were going to, so we dialed back to make sure we were in the right spot where our governance kicks in to make sure we're not taking excessive risk.
Before making any home buying decision it is best to consult a mortgage professional. As the housing market evolves so will financing solutions. Buying a home is one of the first steps toward building equity in an appreciating asset and making financing accessible is one way to bolster the housing economy and help more people achieve the American dream of homeownership.
Sources: CNBC, Curbed