Since the financial crisis, subprime borrowers have generally been taboo. However, it seems to be becoming easier for these individuals to obtain a home loan. The Wall Street Journal (WSJ) recently reported that some private investment firms are extending financing to homebuyers with credit scores lower than bank standards.
In addition, some are accepting alternative documentation regarding proof of income.
If this all sounds familiar, it should, because it was practices like this that led to the recent financial meltdown. Several days ago Federal Reserve Bank of San Francisco economist Kevin Lansing reported that policymakers should have heeded “red flags” like subprime lending well before the financial crisis began.
Just one day later, the WSJ published its report regarding the renewed ease of getting these loans.
It seems many have forgotten that homebuyers with subpar credit and the institutions that wrote mortgages for them were huge culprits in the crisis. This is odd, considering it has only been a few years since the widespread subprime mortgage defaults and collapse of mortgage-backed securities began.
However, firms now engaged in subprime lending say their behavior today is different from back then.
The difference comes in the form of a higher down payment requirement than mandated by a bank. In addition, some firms believe borrowers today are less of a risk than those who massively defaulted several years ago.
In the auto industry, Ally Financial is engaging in a similar practice, providing subprime bad credit auto financing to used car buyers despite risk concerns.
According to another WSJ article, it is likely that mortgage loans over a certain size will no longer be backed by the federal government, come October. This means that more homeowners may be looking for private firms to provide them with jumbo loans.
Firms like New Penn Financial will reap the benefits of these individuals turned away by banks.
