Subprime Mortgages Make a Comeback

Subprime Mortgages Make a Comeback

During the market downturn, subprime mortgages made headlines as the reason why the market was dropping. For those that don’t recall exactly what a subprime mortgage is:

subprime mortgage is a type of loan granted to individuals with poor credit scores (640 or less, and often below 600), who, as a result of their deficient credit histories, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages usually charge interest rates above the prime lending rate. —

After the housing market plummeted, subprime mortgages essentially disappeared and new regulations were put into place. Since then, they’ve made a reappearance, but under a different name – nonprime. Although there are some new standards in place, it largely boils down to being the same as the subprime loans from pre-2008.

Lending Requirements Relax

In the summer of 2017, Fannie Mae announced that it would loosen the restrictions on its lending for loans. This meant that borrowers with higher debt and lower credit scores were able to acquire loans without the previously instituted risk management methods. As a result of these new changes, there’s higher demand in mortgages and a larger number of people with high debt ratios (the debt-to-income limit increased from 45 to 50 percent) are obtaining loans for new homes.

Because the market is still bullish and the rents are increasing, more and more renters are looking to convert into homeowners. However, in some cases, they would not have otherwise been able to acquire these loans because of their debt to income ratio. Additionally, there’s a particular subset of people who have lived the life of living on debt with the (partial) purpose of being mobile and flexible with their living situation.

Who Carries The Debt Now

Since the restrictions on acquiring loans have relaxed, the one group that is pursuing new homes is the Millennials. As the largest home-buying group today, they have a much higher level of debt than previous generations, due largely in part to student loans. Additionally, homeowners that were affected by the previous market crash are still plagued by low credit scores and were still unable to get the mortgages they wanted. Now that has changed and they’re able to get these new nonprime loans, essentially recreating the same group and problem as the last market dump.

What Changes?

Regardless of whether a homeowner had a prime loan or is under a nonprime loan, a foreclosure or tax situation can still happen to anyone. If the day comes when a homeowner is no longer able to afford a mortgage and risks losing the property, it’s always best to sell it and retain some percentage of the equity in liquidated cash vs losing it entirely to an auction. As always, we remain available to those that want to get out in front of situations like that and keep some cash in their pocket.


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