Zero-Down Subprime Mortgages Could Be Making a Comeback

Inside Subprime: Oct 23, 2018

By Ben Moore

Subprime home mortgages are making a comeback a decade after their boom in popularity caused the crippling financial housing market crash. Banks are now offering these zero-down home loans to borrowers with poor credit, including the nationwide Bank of America.

Signs of the subprime mortgage loan comeback began to appear this year when California-based lender, Carrington Mortgage Services, announced they would be offering “nonprime” loans to borrowers with “less-than-perfect credit”. The new term coined for “subprime” comes with new standards. The lender assured that they would not revert “back to the old days” of lending in which “people with no jobs, no income, and no assets were getting loans”, a statement referring to a time when hopeful home buyers could secure a home loan without necessary requirements.

During the boom in popularity of subprime home mortgage loans in the early 2000s, lenders required zero documentation of income for a borrower to be approved. They would offer “teaser” APRs as low as zero percent to entice potential borrowers, and would only add interest to the later years of the loan. Many of these loans were sold to investors, and their lucrative nature incentivized banks to provide as many of these loans as possible. But when lenders were forced to raise their rates in 2007, subprime loans began to enter default status en masse, with customers unable to maintain their soaring monthly mortgage payments. This led to the nationwide financial crisis a year later, and mortgage lenders were forced to essentially lock their doors to those unable to hit the higher credit score requirements in tandem with a minimum 3 percent down payment.

Now, the housing market is strong, and home prices are steadily rising. Entry-level homes are in short supply, enabling homeowners to sell their homes quickly if need be. The stable and growing market has also enabled lenders to revisit subprime loans as a potential income opportunity, this time funded by banks without the involvement of investors. Bruce Marks, the CEO of Neighborhood Assistance Corporation of America, a Boston-based brokerage firm, believes that it’s a “disgrace” that there are so few “low- and moderate-income…homebuyers” and that the subprime loans they’ve helped facilitate have seen “zero foreclosures”. The same could have been said about subprime loans prior to the financial crisis.

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