Is Sub-prime Lending Making a Comeback?

Lenders are returning to the sub-prime market – although still at only a fraction of what sub-prime lending was before the mortgage crisis, BusinessWeek reports.

Some sub-prime lenders that collapsed during the financial crisis are coming back into business with new non-prime loan offerings.

“There needs to be a solution for people who don’t fit in the box, and rebuilding non-prime lending is it,” says Bill Dallas, with his new venture NewLeaf Lending in Calabasas, Calif., which will begin issuing non-prime loans. However, he says this time around tougher lending rules will require borrowers in some cases to put up to 30 percent down as well as require more careful documentation of borrowers' incomes, credit, and work history.

About $3 billion of sub-prime mortgages were issued during the first nine months of 2013, according to Inside Mortgage Finance. In 2005, sub-prime originations totaled $625 billion.

Sub-prime loans – mostly targeted to those with credit scores below 660 – took a lot of blame in the financial crisis. Lenders sold high-risk products to investors with adjustable-rate mortgage products that had interest rates that could triple after two years, in some cases. Also, many of the loans had required little documentation about the borrowers' income and assets. The loans were blamed for sparking a huge wave of defaulting borrowers.

Since then, federal regulators have restricted many high-risk mortgage products. Lenders are also requiring higher credit scores and greater documentation of a borrowers' financial situation.

Source: "Subprime Mortgages' Modest Comeback," BusinessWeek (Feb. 20, 2014)