He said nonprime lending today bears very little resemblance to nonprime lending from the early to mid-2000s, but that it does, in fact, look a lot like nonprime lending from the 1990s. In the 1990s, he said, each risk factor in a loan was mitigated by an offsetting factor, so that for instance a borrower with poor credit had to put more money down. The problems that occurred in the 2000s, he said, came about because lenders didn’t require mitigation of negative factors, and when you throw bad credit in with no money down or unverified income you have the recipe for exactly what happened.
“We believe a lot of the difference between now and 10 years ago is just the makeup of today’s borrowers, who have skin in the game. Gone are the days of no money down and no money in the transaction. We have people buying houses and bringing their hard earned money to the table and that is an amazing incentive to maintain your investment,” he said. “That is the biggest difference.”
Hutchens said Angel Oak looks at every transaction individually and makes lending decisions based on each borrower’s circumstances.
“If people have had credit challenges, but have cash now, generally there is a story behind their poor credit, and we want to hear that story. Perhaps someone lost their job and lost their home because of that, but now they have a job. They are back on their feet, they have saved money, we like that. We understand the whole story behind the credit events and we make decisions based on the whole story,” Hutchens said.
“The person who has bad credit and no cash won’t get a loan today. They could get a loan in the past but only for a brief period in time when guidelines and common sense were not maintained,” Hutchens said.
If people with bad credit and no cash can’t get a mortgage from Angel Oak, that doesn’t mean someone can’t get a loan the day their foreclosure is settled. “If it makes sense, we can make a loan as soon as a foreclosure is completed, but it’s got to make sense. Let me give you an example. Somebody who got a $500,000 mortgage at the peak in ‘06 or ‘07 and they have tried to hang on but finally had to let their house go and today they want to buy a $200,000 house. They want to put 25% down, and today, based on their income, they fully qualify to make the payments. We like that loan. We believe that is a second chance kind of loan, and we like it,” he said.
“On the opposite end, someone who just went into foreclosure on a $200,000 loan and now they want to buy a $500,000 house, we don’t like that loan. We aren’t going to do that loan, so we go into every loan with our eyes wide open. We are looking at every loan and asking does this scenario make sense?”
If nonprime lending is not what it used to be, maybe it’s because your frame of reference is too short, suggests Angel Oak Mortgage Solutions Senior Vice President of Sales and