Subprime Bonds Return As “Nonprime” Bonds
Subprime bonds are back, but, from now on, they will be called nonprime bonds. More and more executives are trying their best to revive the lending market of the subprime bonds, as they believe that millions of people with bad credit are kept out of the mortgage market by the strict federal standards.
Nonprime loans are aimed towards the riskiest borrowers, towards those with an inconsistent income, with low credit scores or high debt to income ratios. According to recent data, subprime mortgages accounted for only $3 billion during the first nine months of 2013, compared to $625 billion reached in 2005.
This time, investors are staying away from subprimes, which means that lenders have two possibilities: to sell their loans to private companies until their track record is strong enough to provide mortgage backed security to investors or to simply hold on to the loans.
Some years ago, lenders handed out mortgage loans without any down payment and with limited documentation, now, nonprime loans require no less than 30% down payment as a safeguard for the investment. However, the opportunities will not take long to appear, as the mortgage market remains a closed territory for millions of citizens due to the strict federal lending standards.
Why did the subprime loans die?
Several factors and high-risk products led to the U.S. subprime mortgage crisis in 2007. One of these was the ARM, given that, under the respective conditions, the interest rate tripled in two years. Bankers expected the loans to be refinanced before the adjustment, assuming that the prices for homes would keep rising. Unfortunately, this did not happen.
In the same period, many lenders began to offer the No Income, No Assets products or “liar loans”, as they were often called. These were mortgages that were based on the unproven income of the applicants and most of them were given to subprime borrowers or those who had a credit score of under 660. The severe decline in home prices led to mortgage delinquencies and the depreciation of the housing-related securities.
What led to the revival of nonprime loans?
The new federal rules, among which the new Qualified Mortgages, released by the Consumer Financial Protection Bureau, aim at avoiding the mistakes made in the past, the ones that lead to the crisis. They impose several requirements, to ensure that the borrowers can afford the loans they are getting.
According to them, qualified mortgages can no longer include many of the options that could have helped low income citizens buy a house, such as the negative amortization, when the payment does not cover the entire interest due, balloon payments through which the loan can be paid at once after a number of years or loan terms that exceed 30 years.
The new nonprime bonds target the same subprime consumers, but, this time, significant down payments and documentation of income are necessary. Reopening this side of the bond market promises to expand lending and lower consumer costs, helping the recovery of the housing market and encouraging American families to take the step from renting to homeownership.
Do you want to take the next step as a home owner? Contact Maureen Martin to setup an appointment to speak with the best San Diego mortgage professional.