Private Investment Firms Lending To Subprime Borrowers Again

Subprime borrowers have been largely unwelcome in the lending market since the financial crisis, but it's becoming easier for them to get a home loan.

A number of private investment firms are lending to home buyers whose credit scores do not meet the standards of banks, accordng to the Wall Street Journal. The firms are also more willing to accept alternative forms of documentation as proof of income.

The WSJ report comes only a day after a paper published by Kevin Lansing, an economist at the Federal Reserve Bank of San Francisco, who argues that runaway subprime lending was one of several "red flags" policymakers might have heeded in advance of the financial crisis.

Buyers with questionable credit, and the financial institutions that issued them mortgages, have received a lion's share of blame for the financial crisis, which was presaged by widespread defaults on subprime mortgages and a collapse in mortgage-backed securities.

According to the WSJ, the firms draw a distinction between what they're doing now and what took place during the run-up to the subprime crisis. They're requiring higher down payments than banks would, and seem to believe they're lending to borrowers who pose less risk than those who defaulted in large numbers a few years ago.

In catering to borrowers with imperfect credit, the firms' behavior is reminiscent of that of Ally Financial, which has been deliberately courting used car buyers with subprime loans despite concerns about risk.

Last week, the WSJ reported that the federal government will likely stop backing mortgage loans above a certain size in October, meaning that come fall, there may be more homeowners seeking "jumbo loans" -- in most cases, a loan above $417,000 -- from private firms.

Currently the government guarantees loans up to $729,750, but in October that figure is expected to come down to $625,500 in major markets like New York and Los Angeles, and as low as $271,050 elsewhere.

The WSJ reports that there are at least two firms making jumbo loans to borrowers with questionable credit. One of them is New Penn Financial, a subsidiary of the mortgage company Shellpoint Partners. In a recent item about Shellpoint and one of its founders, the financier Lewis Ranieri, the WSJ noted that one of the company's goals is to to make mortgages accessible to borrowers whom banks would turn away.

"Former traditional prime borrowers with good credit scores who could comfortably make mortgage payments are being precluded from home ownership due to banks' rigid criteria," Ranieri then told the WSJ.

Comments

[Burgen]

12:08 PM on 07/14/2011

Boy nothings gonna' happen to correct any of this as long as we continue to bleed jobs over seas. You can create 1000 jobs a day but if 2000 a day are leaving to India, China and wherever the lowest denominator is, we'l'l continue to sink. Our boat's taking on water at 5 gallons a minute and we're only bailing 3 gallons a minute. No one is addressing this. They're too busy posturing for the next election. If there are no jobs. There's no one to buy mortgages. My Wife's company has outsourced her job after 40 years of service, along with 300 plus more to India, and it just continues and continues. Wake up!

[Pooter1]

10:13 PM on 07/13/2011

According to court documents reviewed by Investors Business Daily, the Justice Department has asked several banks to relax their mortgage underwriting standards and approve loans for minorities with poor credit as part of a new crackdown on alleged discrimination laundhed by the DOJ.

In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.

Some blame that in part for the subprime boom, because banks were ordered to throw open their lending windows to credit-poor minorities. That crackdown spurred the American Bankers Association to distribute to its thousands of members "fair-lend ing tool kits" advising the adoption of more permissive underwriting criteria to help inoculate them from prosecution.

As part of settlement deals, prosecutors have required banks to sign "nondisclosure agreements" barring them from talking about the methods used to allege discrimination. Bank lawyers contend the prosecutors are trying to hide the shaky legal grounds on which the cases are built. "It's horrible what they're doing at the civil rights division," said Reginald Brown, a partner at Wilmer Hale in Washington, who has represented banks in connection to recent race-bias investigations. "They don't have any proof, just theories."

http://www.investors.com/NewsAndAnalysis/Article.aspx?id=577794&p=2

[Quitcherbichin]

12:10 AM on 07/14/2011

AArrrrggggg..

[Quitcherbichin]

12:13 AM on 07/14/2011

I guess that in the eyes of Holder some people are more equal than others...can the AG be impeached? If he can this is one who desperately deserves it.

[Michael Nahra]

08:38 PM on 07/13/2011

People with good credit are not getting loans since the government had placed so many restrictions on the lenders. This is why the economy has not recovered. We need this so the property values will recover and people can get back to work.

[GetRealSoon]

09:14 PM on 07/13/2011

We need Elisabeth Warrens Consumer Financial Protections Board verifying these loans are lawful then we can recover and people can go back to work.

[Paul1963]

08:21 PM on 07/13/2011

Hmmm well I see my comments yesterday were not posted. I read that WSJ article and the entire picture is not being painted correctly in this recap.

1) The down payment in some cases of these loans are as high as 40%
2) The originators are not selling these loans, they are holding them, so there is a real incentive to make sure they are good loans. It was the originating and selling of the loans that really casued a lot of the problems past time.
3) The loan does require people to prove income, but those offering these loans are allowing some different documents of proof as opposed to traditional loans.
4) Most of the loans include a balloon payment in five years.

Come on HP, this article is bad journalism.

[Ben Edat]

08:09 PM on 07/13/2011

There are people who have good credit, can afford a mortgage, have a down-payment, but don't have all the information the banks want and are denied a loan. The banks are too mechanical with their requirements. If someone is obviously a good risk, they should be able to make a loan.

[Gunther Steinberg]

08:02 PM on 07/13/2011

Will the banks start a new round of packaging sub-prime loans as AAA securities ans start a new housing debacle to come? If the lenders of sub-prime loans cannot sell their loans off, they will bear the penalty of a default. But would they start this if they did not have a means of getting rid of this bad paper?? Who is supposed to kep an eye on these people?

[Todd Behrmann]

07:28 PM on 07/13/2011

We still haven't gotten out of the mess this started before, and it starts again. I can't believe people are this stupid.

[sfizi]

07:04 PM on 07/13/2011

This may be the start of recovery ...

[Michael Nahra]

08:33 PM on 07/13/2011

I think you are right. This is the 1st time the housing market fell so drastically and the government went overboard in its reaction. Once home buying pics up,the rest of the economy will follow.

[interesting70]

06:46 PM on 07/13/2011

Actually, if Private investment firms are lending the money, then if the homeowner defaults it is not the government's responsibility to bail them out...they just go out of business or restructure their financial platforms. Obviously private investment companies they see some merit to lending subprime (probably the huge down payments or property acquisition somewhere down the road.)..obviously, banks that were bailed or offered bail are not lending to most creditworthy applicants, so what if you want to own a home??

[Michael Nahra]

08:39 PM on 07/13/2011

According to the Pres. rent.

[tlcpro]

05:59 PM on 07/13/2011

They should get rid of the credit reporting system. It is flawed and right now everyone has bad credit scores.With banks not lending to anyone under 620, it's hard to get credit. Everyone took a hit in the credit market.

[Michael Nahra]

08:40 PM on 07/13/2011

Many above 620 cannot get a loan either due to other regulations.

[Pooter1]

05:44 PM on 07/13/2011

If this wasn't bad enough, it looks like the DOJ is now forcing banks to set aside millions of dollars for 'special financing' so loans can be made to minorities that, per the DOJ's settlement with Midwest BankCentre, "....would ordinarily not qualify for such rates for reasons including the lack of required credit quality, income or down payment."

In several cases, the government has ordered bank defendants to post in all their branches and marketing materials a notice informing minority customers that they cannot be turned down for credit because they receive public aid, such as unemployment benefits, welfare payments or food stamps.

http://www.investors.com/NewsAndAnalysis/Article/577794/201107081851/DOJ-Begins-Bank-Witch-Hunt.aspx

If someone puts down $80k down on $200k house as these private investment firms are requring, the they likely to do whatever they can to not loose that money compared to someone that has only a 10% or maybe 0% downpayment.

Some folks just never learn.

[Jill1975]

05:07 PM on 07/13/2011

The reason they are lending to these higher risk borrowers is probably that they will just sell the loans which will once again be sliced and diced and sold as securities ending up in pension funds.
If the people who committed securities fraud in the sale of CDOs before the financial crisis were fined or in the slammer , this wouldn't be happening again . If we didn't bail out the banks , this would not be happening.

[palmer1619]

04:58 PM on 07/13/2011

And who are they going to sell the mortgages to? It's immoral that our government permits this to continue. These people are so crooked, we can't watch them 24 hours a day. Let's send them all to a deserted island and let them fend for themselves. I'd love to see that. But I know the Republicans will sneer at any kind of regulation saying that it will hamper business. No, what it would hamper would be outright theft. Can we find out who the primaries are?

[giwel7]

04:46 PM on 07/13/2011

"shell"point partners? wonder what bank really owns this company. follow the money to the islands

[sick of tea]

04:41 PM on 07/13/2011

I don't see the problem here, assuming that the banks are actually validating the employment, income, and ability of the borrower to pay for the loan. Not all subprime is the same. It doesn't sound like we're returning to the "anyone with a pulse" policy where they would falsify income to fit a loan that could never be paid.

Here's a key point:
"Former traditional prime borrowers with good credit scores who could comfortably make mortgage payments are being precluded from home ownership due to banks' rigid criteria," Ranieri then told the WSJ.

If there is no relaxation of credit standards there's going to be a lot of people who can afford a home, want a home, but can't get approved because they lost their job during the recession and missed payments. I just spoke to my bank about a refi and was rejected because i have a foreclosure 2 years ago. Had to give back investment property because it wouldn't sell after 3 years on the market and going through a divorce. I've owned my current home for 10 years and never missed a payment. You can't paint all subprime borrowers with the broad-brush as a "deadbeat" or as a risky gamble. Those of us who can prove they can afford a home should still have the opportunity.

[giwel7]

04:47 PM on 07/13/2011

sick of tea? well the bank may have a cup of kool aide for you!

[mistykane]

05:23 PM on 07/13/2011

A sub prime doesn't have the stricter requirements of a conventional loan. So if a person has the income and credit to be a good risk he is issued a conventional loan. Sub primes are always riskier.