Major Bank Hands Out $10 Billion in Subprime Home Loans
Inside Subprime: Oct 30, 2018
By Ben Moore
A major American bank has handed out over $10 billion in subprime mortgage loans to Americans across the country. The loans come with a fixed-rate of about 4.5 percent for 15 or 30-year terms, and require zero down payment. The bank partnered with a brokerage firm in Boston to provide the loans at a series of events across the country including cities such as Charlotte and Atlanta.
As opposed to a traditional home mortgage application process, which requires approval from lenders after reviewing income streams, credit history, and a sufficient down payment, the bank loans were provided based on “character-based lending criteria.” The criteria required borrowers to attend a subprime loan education session, receive regularly scheduled budget counseling and planning, and submit income statements and monthly bills for review. The loans cannot be used to invest in home ownership.
This method of loan approval purposefully overlooks poor credit history in an attempt to “help people who’ve been locked out of homeownership” to access the opportunity to “build wealth.” Over 10,000 hopeful home-owners showed up to the events, and most applicants walked away with an approved mortgage loan, with the approval rate coming in at a high 90 percent. The brokerage firm receives a $3,000 commission on every loan approved.
Very few similar programs exist. The Veterans Administration is the only organization that offers home loans with no down payments, and these loans are only available to veterans and their families. Other similar programs require mortgage insurance, which can be expensive. The senior vice president of consumer lending at the bank, sees the opportunity as a “total upside” with “significant wins” coming out of the partnership with the brokerage firm. The brokerage firm’s CEO, believes it is a “national disgrace” that home ownership is declining across the country, especially for “low- and moderate-income people.” He sees the program as a step towards helping many who could use home ownership to grow their financial status.
Still, many have been critical of the program, comparing it to the subprime lending boom that led to the financial crisis of 2008. The crisis saw many subprime home mortgages enter into default status once their interest rates rose from the initial “teaser rates” of zero percent and mortgage payments became too costly to maintain. The crisis forced home loan lenders to tighten up their application scrutiny, requiring significantly higher credit scores and a 3 percent minimum down payment.
Critics argue that the exclusion of a down payment from the application process results in the homeowner having “no skin in the game” which implies the owner has “no reason not to walk away should their homes lose value”. But the brokerage firm believes this to be false, claiming that homeowners that walk away are typically “higher-income people who look to homeownership as an investment, just like buying stocks and bonds” while “working people look at their investment in homeownership for their family […] neighborhood, [and] themselves.”