According to an article written by Angela Pruitt at The Wall Street Journal, Lewis Ranieri is back and is preparing to enter the subprime mortgage market with a company call Shellpoint. Ranieri's company, which acquired New Penn Financial, is poised to enter the subprime mortgage market, but will need to raise millions of dollars in capital to hold mortgages that they may not be able to sell on the secondary mortgage market for some time to come.
" there is little doubt that consumer demand for alternative mortgage financing is growing as traditional banks shut out all but the most pristine borrowers."
The article (published on June 23, 2011) states that the pendulum has swung too hard the other way. Almost four years have passed since the summer of 2008 when the mortgage market all but locked up and no one, not event the squeaky clean, could obtain a mortgage to buy a home. Today, lenders are lending, but only to the triple-A borrowers. Borrowers who purchased homes anywhere between 2003 and 2007 will likely be those who will best fit Penn Financial's customer profile since those borrowers where hardest hit by the mortgage crisis, who may have defaulted on adjustable rate mortgages or they simply had no choice but to purchase homes at the peak of the market and can no longer sell them for what they were once worth and have to default in order to get out from under the thumb of their current lenders.
"Shellpoint says it has no plans to bring back the most discredited forms of subprime loans, including the infamous no-documentation mortgages, often dubbed liar loans, which allowed borrowers to obtain loans without proof of income or employment."
Shellpoint will start off on the right foot, but, what's to keep Shellpoint, or any other mortgage originator who enters the subprime market, from lowering the bar again and lowering it again after that? Just before the big meltdown, if you were breathing and could sign your name, you could qualify for mortgages and home equity loans. And, many people used the run up in home prices to fuel purchases of second homes, indulge in luxury lifestyles, and pay for expensive kids' college tuitions, and much, much more. Homeowners used their homes as giant ATM machines to dispense cash in the tens of thousands of dollars.
"The aim is to target borrowers whose credit profiles prevent them from obtaining conventional mortgages in the tight market but who are nevertheless good credit risks and can make a down payment of at least a 15%. The company said a typical borrower could include self-employed contractors and other professionals who have assets and a steady income stream. The self-employed have been the hardest-hit by bank credit-tightening trends."
So, Shellpoint aims to lend to borrowers who are currently under-served by traditional lenders. Those lenders, including Bank of America, Wells Fargo, Citibank, Chase and others have a lot of work to do to absorb the fallout from the prior subprime mortgage meltdown. It could take years for the traditional lenders to process all the pending short sales and foreclose on defaulting borrowers.
The run up in home prices that fueled greedy lenders to lower standards for loans time and again started at the beginning of the last decade, shortly after we rang in the New Millennium. It's going to take the rest of this decade, perhaps until 2020, for housing prices to recover and for the system to wash out all the bad loans and defaulting borrowers. Until then, there will be continued pressure on the rental market while borrowers cannot obtain financing to live out the American dream of home ownership. Homeowners will continue to be displaced from the homes they own that are either over priced or over financed. This crisis has scared forever the first ten, and maybe twenty, years of the New Millennium.