Subprime lending, 2013 edition | Bedford NY Real Estate

Think subprime mortgages have gone away? Think again, we have one lurking within FHA, with features that are eerily similar to those of the private market that went into hyper-drive in the 2000s, and collapsed in 2007.

The central features of a subprime market are:

• Expensive marketing directed to borrowers with very poor credentials and few options.
• Liberal qualification requirements that allow some of these weak borrowers to be approved.
• Overcharges, with profit margins much higher than those available on other mortgages.
• High default rates.

Expensive marketing: The techniques used in the two recent subprime markets to target potential customers are the same. A letter I received recently described “an event sponsored by a real estate company/mortgage company to help people that have had a foreclosure or short sale get back into a house. We did a short sale on our house about two years ago. While there our qualifications were checked, and a few days later they approved us.” The approval was for an FHA. Other than that, this letter could have been written 10 years ago.

Liberal qualification requirements: The private subprime market depended on the substantial liberalization of underwriting requirements that arose out of the housing bubble during 2000-2007. The prevailing assumption was that rising house prices would convert the otherwise weak subprime loans into good loans — which they did, until the bubble burst, at which point the default rate ballooned.