Although a number of people still cringe at the term subprime, some subprime lenders are reporting strong investor appetite for the once-reviled mortgage products.
These lenders do not shy away from using the name subprime for their products, but make it clear they are not the dubious prerecession mortgages that helped crash the economy.
Investors are interested in recent subprime loans for their better returns than traditional mortgages — but also because, in exchange for overlooking a bankruptcy or low credit score, lenders are requiring borrowers to bring large downpayments and solid proof that they can repay.
Angel Oak Mortgage Solutions offers a “non-prime" product on a wholesale basis for borrowers with credit scores as low as 500 and with debt-to-income (DTI) ratios as high as 50 percent, while the company's “recent housing event” product offers similar terms for borrowers one day out from a short sale or foreclosure. Borrowers, however, are required to put down at least 20 percent.
“This is the new subprime,” Angel Oak Senior Vice President of Sales and Marketing Tom Hutchens told Scotsman Guide News. “Everyone has preconceived notions about what subprime means. This really resembles how subprime first began — [the borrowers] have equity in the transactions, and
fully documented incomes.”
Hutchens said the average subprime borrower has a credit score in the mid-600s, and the average DTI is below 35 percent.
Depending on the risk of the borrower, these mortgages carry interest rates between 5 percent and 9 percent. Hutchens said that all types of investors are after the Angel Oak subprime products, from hedge funds to large mortgage lenders — “anyone who’s looking to participate in the mortgage business at higher coupons besides agency modes.”
Angel Oak services some of the loans, but actively sells all the loans.
Athas Capital Group Inc., one of the first companies to reenter the subprime space several years ago, is keeping almost all its mortgages on the books, stopping to sell about 10 percent to 20 percent of production to investors per year. Athas CEO Brian O’Shaughnessy calls the products “sane subprime.”
There were investors asking about Athas subprime products from the beginning, O’Shaughnessy said, but lately investors have been seeking subprime with fervor.
“It’s out of control; it seems like there’s 10 times the amount of demand to buy this paper as there are borrowers that want the loans,” O’Shaughnessy told Scotsman Guide News. “There is a line outside the door to buy our paper.”
One reason, O’Shaughnessy said, is because Athas has has had no defaults and has no current 30-, 60- or 90-day late payments on its subprime loans (there was one 60-day late payment last year, but that borrower caught up, O’Shaughnessy said). Typical borrowers, he said, come to Athas because they can close on a mortgage quickly. The average credit score is 702
on its subprime products, even though Athas goes as low as 550.
“Probably the biggest reason [borrowers] come to us is alternative proof of ability to repay, or if they have a past foreclosure or bankruptcy that’s too recent for a bank to consider,” he said.
Citadel Servicing Corp. entered the subprime lending space three years ago, and CEO Daniel Perl said there are about seven firms investing the products. Perl called prerecession subprime loans "a joke," saying that Citadel borrowers must bring at least 30 percent equity to the table to qualify for a purchase loan, and must bring proof that they can pay.
"The people investing in this understand that these are well thought out mortgages for people who can actually pay," Perl told Scotsman Guide News. "We're having no problem selling it."
Perl said Citadel expects to originate about $600 million in subprime in 2015.
The real estate investment trust company Two Harbors Investment Corp. is an example of a subprime investor,
reporting $3.9 billion in non-agency mortgage investments in its September earnings.
“Our expectation and certainly hope would be, as this market opens up and becomes fairly meaningful, that a securitization market would develop,” said Two Harbors Chief Investment Officer Bill Roth of the subprime investments during an earnings call.
Other companies investing in the products include Macquarie Group Ltd. and Western Asset Management Co. Recently, Lone Star Funds committed to buy $1 billion worth of non-qualified mortgages from Caliber Home Loans. Caliber offers four non-agency products on a wholesale basis.
The market for subprime, however, is still small. Hutchens reported between $10 million and $25 million in originations per month, but the company is continuously adding brokers in new territories. To keep growing, the industry needs many more brokers willing to work with subprime products, O’Shaughnessy
“We’ve known since 2008 that it’s not the subprime borrower that went away, it’s the product availability,” Hutchens said. “I think we’re going to continue to grow. It’s hard for us to say which year it’s going to hit and at what level, but we know it’s going to be significant.”