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Sam Gendusa June 5, 2018

Newsletter - June 2018

As rents continue to increase, more Americans are considering home ownership. But for many, poor credit stands in the way: One-fifth of U.S. consumers have “very low” credit scores that could disqualify them from obtaining a mortgage.

People who went through foreclosures or took other hits to their credit during the Great Recession are still dealing with low FICO scores, and Millennials — today’s largest home buying contingent — are saddled with more student debt than previous generations.

To accommodate these borrowers, some financial institutions are relaxing their lending standards, offering loans to people with higher debt and lower credit scores.

Mid-sized lender Carrington Mortgage Services is offering loans of up to $1.5 million on single-family homes, town homes, and condominiums to borrowers with credit scores as low as 500 — even if they have a recent foreclosure, bankruptcy, or history of late payments.

These loans are known as “nonprime” loans — and if you think that sounds a lot like “subprime” loans, you’re not wrong. The biggest difference, however, is that today’s nonprime borrowers are likely to pay higher interest rates and be required to make larger down payments to offset the risk to lenders.

“We believe there is actually a market today for people who want to buy nonprime loans that have been properly underwritten,” said Rick Sharga, Executive Vice President of Carrington Mortgage Holdings. “We’re not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans.”

Carrington isn’t alone in this space: Alternative mortgage wholesale lender Angel Oak started offering and securitizing nonprime mortgages two years ago; today, more than 80% of its loans are nonprime. According to company representatives, their nonprime securitizations are “a who’s who of Wall Street.”

Even Fannie Mae has dipped its toe in the nonprime game, raising its debt-to-income (DTI) limit from 45% to 50% without mitigating the additional risk with other factors. Demand exceeded expectations: The share of high-DTI loans sprung from 6% in January of 2017 to almost 20% in February of 2018. When mortgage insurers balked, the lender recalibrated its risk-assessment criteria.

“We got a bigger response than we thought we were going to,” said Fannie Mae’s Chief Economist, Doug Duncan. “So we dialed back to make sure we were in the right spot where our governance kicks in to make sure we're not taking excessive risk.”

With the financial crisis of 2008 a decade behind us, here’s hoping lenders are able to strike the right balance.

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