Tightening Subprime Standards

Mortgage lenders are really starting to tighten their standards in the subprime lending area. The subprime customer is one with poor credit history, low equity, those who need to state their income or assets and especially those who want to go to 95% of the value or higher. This represents approximately 15% of potential borrowers.

The reason for the tightening standards: many subprime lenders have gone down in flames in the past few months, due to approving borrowers who ended up defaulting on thier loans. Or, they end up with borrowers who are in "early payment default," meaning that they have missed thier first, second or even third house payment. Investors who buy home loans on the secondary market, required lenders to buy back loans with early payment defaults. When the lenders didn't have the funds, they had to shut their doors. Many of you have probably seen this happen with Ownit Mortgage, and, today, Fremont Investment & Loan. My Account Executive had been with Fremont for 10 years and was blindsided by this...so unfortunate.

 Those subprime lenders who have not gone under are now tightening their guidelines in order to avoid the same fate as their former competitors. Underwriting requirements are becoming more stringent and rates are going up to protect the lender, as the loans get riskier, due to the inability of some borrowers to make their payments and the pressure from investors. These new, tighter standards are displayed with requirements such as higher credit scores, bigger down payments and lower loan amounts.

Of course, this doesn't affect many of our borrowers; those who are in the approximately 85% of consumers with higher credit scores and lower loan-to-values. However, it could have quite an impact on those of us who work with both high-end borrowers and subprime borrowers. I think it's a wait and see game for now.

Please share your thoughts...thanks!