But nonprime loans are finally coming back – and in a big way, according to Tom Hutchens, senior vice president of sales and marketing at Angel Oak Mortgage Solutions. A new, safer nonprime is increasingly becoming a part of originators’ toolboxes.
“Nonprime is setting records every month simply because of the growth in awareness,” Hutchens recently told MPA.
And investors in the secondary market are getting back on board. Credit Suisse announced this week that it would market the first agency-graded subprime mortgage-backed bond since the meltdown. And even as far back as December, Angel Oak itself announced its securitization of more than $150 million in nonprime whole loans.
“When Angel Oak was founded, we aimed to take advantage of dislocations in subprime residential mortgage-backed securities that were deeply undervalued following the financial crisis,” managing partner and co-CEO Michael Fierman said of the securitization. “As those legacy products started to regain popularity, however, supply started to dry up. Strict credit standards put in place following the crisis made it extremely difficult for borrowers with imperfect credit to get a loan. This created a void in new originations and the corresponding securitized mortgage instruments.”
One reason nonprime loans are making a comeback after years of near-dormancy is simple: today’s nonprime loans aren’t like the nonprime of the “wild West” years before the meltdown.
Today’s non-agency loan requires a higher credit score, for instance. In times past, the average credit score for a subprime loan was 580. Today it’s between 670 and 680. And many subprime loans prior to the financial crisis were “zero-doc” loans that didn’t require any money down, or even proof of income. Today, Angel Oak requires at least 10%-20% down and a fully documented ability to repay.
With those safeties in place, and nonprime loans increasing in popularity again, they can be a boon to originators.
“Originators need to know that this is a way for them to grow their business,” Hutchens told MPA. “If they’re not providing these solutions to their real estate agents, someone else will.”
Nonprime loans, once a cash cow for mortgage originators, came screeching to a near-halt in the wake of the financial crisis. From $600 billion in nonprime loans written in a single year during the run-up to the meltdown, the once-lucrative loans plummeted to well under $1 billion per year after the collapse.