A few years after bad subprime housing loans tanked the U.S. economy, they appear to be making a comeback, according to a recent article in the WSJ.
New rules and oversight in place after the near-economic meltdown meant that banks could no longer offer no-documentation loans. Credit standards were also stiffened for loan applicants.
Could back-door risky loans lead us back here?
A few private investment firms have started offering new loans to applicants who do not meet the banks’ new standards. Two of these are Athas Capital Group, of California, and New Penn Financial of New York.
The two firms also offer jumbo loans, that is loans exceeding $417,000 in most of the U.S.
An analysis by Corelogic – a research firm – shows that in February, the percentage of loans that did not meet the standards for a government guarantee exceeded 2% for the first time since 2007, when the crisis hit.
The private firms claim that they are just meeting demand and helping those customers who lack one or two items such as a document or an acceptable credit score. They claim they vet customers closely and still require proof that the customer will repay.
They extract much higher interest rates from borrowers – up to 13% – and offer mostly balloon mortgages that require the borrower to refinance or pay off the balance after five or seven years.
This trend is likely to continue in October, when the government lowers the limit on the loans it guarantees to as low as $271,050 in some places. In some instances, this represents a drop of almost $100,000.
It is almost certain that demand for these larger loans will be satisfied by the private companies, unwilling to “leave money on the table”. The government is unlikely to step in as these firms are not regulated banks.
What is your view? Will this take us back to the subprime morass we are still trying to recover from?
