Before the housing bust, a sprawling business arose in subprime mortgages and their cousins, so-called alt-A loans, which were issued to people who had decent credit but did not have to prove income. About $1 trillion in subprime and alt-A loans were originated in 2005 and again in 2006 — more than a third of all home loans, according to the trade publication Inside Mortgage Finance.
A subprime loan is a higher risk, more expensive loan that should require a larger downpayment, said Marianne Collins, executive director of Ohio Mortgage Bankers Association.
“It’s priced based on the risk,” Collins said. “What happened during the housing boom is people that had unacceptable credit, they were doing subprime loans for these people with little or nothing down, no income verification.”
No major increase in subprime lending activity is on the radar of trade group Ohio Bankers League, said spokesman James Thurston.
“It was states like Florida, California particularly … they had much larger portion of the subprime market,” Thurston. “We’re back in an appreciating market, so could you see more of this? You could.”
The explosion of mortgage defaults that began in late 2006 vaporized an entire industry of subprime specialists. The Wall Street firms that had bundled the loans into securities soon began to implode as well. Little wonder that loans for the credit-challenged disappeared.
Today’s high-risk lenders differ from those during the housing boom in key ways. These lenders say the new subprime mortgages are actually old-school — the kind of loans made in the 1980s and 1990s. In other words, a borrower’s collateral matters, down payments matter, and income and ability to pay matter.
Subprime lenders care because they are holding the loans on their books rather than selling them to investors. They hope a private securities market for subprime loans, also destroyed in the meltdown, will re-emerge soon.
For now, the subprime and alt-A business remains small, maybe $8 billion total, estimated Inside Mortgage Finance Editor Guy D. Cecala. That’s less than half of 1 percent of the $1.8 trillion in U.S. home loans last year.
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