Subprime Lending is Back – but with changes!

 
According to data from the latest Equifax National Consumer Credit Trends Report, first mortgage originations for subprime borrowers (consumers with an Equifax Risk Score of 620 or below) showed steady growth in the first three quarters of 2015.
During that time, more than 312,000 new mortgages were originated totaling $50.7 billion – an increase of 28 percent in the number of first mortgage originations and 45 percent increase in the total balances year-to-hear.
“While there are many characteristics that define a subprime loan, such as the specific terms of the loan and the lender who issues it, credit standards are becoming more accommodating to meet market demand,” says Amy Crews Cutts, chief economist at Equifax. “At the same time, lenders are focusing more attention on evaluating consumers’ ability to repay. This has led to a much larger reliance on third-party data verifications that enable lenders to more accurately vet subprime borrowers much earlier in the origination process.”
The industry is also seeing an increase in subprime activity within the home equity market, with the total balance of home equity installment loans originated for subprime borrowers increasing with a 32.7 percent year-over-year increase. Total credit limits on home equity lines of credit (HELOCs) increased 6.8 percent year-over-year.
“Home equity installment loans are often more suitable for consumers with credit issues, but the regulatory costs and underwriting burdens have typically made them very expensive for lenders to originate,” says Cutts. “Conversely, HELOCs are generally more popular among consumers but less accessible to subprime borrowers.”
Cutts says mortgage insurance is a viable alternative for home equity loans that might be used as piggyback financing for part of the downpayment on the first mortgage. And they “may explain why we are not seeing similar proportionate increases in subprime home equity loans.”
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