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Subprime loan volumes stage a partial comeback in 2015

Loans to borrowers with weaker credit scores rose dramatically in the first 10 months of 2015, but this doesn’t mean a new subprime era is upon us, according to analysts.

In the first 10 months of 2015 through October, loans to borrowers with FICO credit scores below 620 (which is often called subprime) rose by 28 percent by count and 46 percent by volume, compared to the same period in 2014, according to the credit-reporting agency Equifax. Subprime lending hasn’t yet made a huge dent in the overall market, however, said Amy Crews Cutts, the chief economist with Equifax during a telephone interview.

Amy Crews Cutts

“Although we saw this huge percentage gain in subprime first-lien activity, it was not in lockstep with overall mortgage growth,” Cutts said. “The growth rate of prime mortgages was even faster.”

The market share of subprime loans was declining through the first 10 months of last year. Through October, subprime loans accounted for just a 4.7 percent share of the loan counts and 3.2 percent of the overall volume of loans, as compared to a 5 percent share of the counts and 3.4 percent share of volumes through the first 10 months of 2014, Equifax said. Subprime lending counts and volumes last jumped dramatically in 2013 during a boom in refinancing, but then fell back significantly in 2014 in a weak year for mortgage originations overall, according to Equifax data.

Subprime lending is also nowhere near as high as it was prerecession. Equifax said the first-lien loan originations to these subprime borrowers totaled roughly 312,000 with a balance of $50.7 billion through October of 2015, compared to nearly 718,000 loans with a balance of $102.5 billion for the same time frame in 2008.    

“It is a low base relative to where we were in ’05 or even ’08,” Cutts said.  

These totals represent all purchase and refinance loans with Equifax risk scores. Cutts said subprime lending share would have to increase to around a range of 8 percent to 10 percent to reach the historical norm.  In 2008, the year the housing market crashed, loans to borrowers with credit scores of 620 or less accounted for 8 percent of the overall volume of loans and 11 percent of the loan counts, Equifax said. However, Cutts noted that a lot of subprime lending once involved borrowers with high credit scores who obtained risky loans.

Cutts said the subprime market has changed dramatically after government regulations brought heightened scrutiny of lenders and borrowers. Lenders also are no longer originating a host of high-risk products, such as no-doc and negative amortizing loans.  

“Now we would look back and call those really dirty subprime,” Cutts said. “There is a big role for subprime to play in the marketplace that is positive, but only if it is done in a nonpredatory and well-underwritten manner.”

Subprime lending remains off 

Other data suggests that subprime lending is rarely occurring.

Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center, said its data show significantly lower totals than the Equifax figures. She said there were 166,000 loans to borrowers with FICO credit scores at or below 620 in the first 10 months of 2015, a 9 percent year-over-year increase from 2014. She said roughly 52,000 of these loans were purchase loans.

In December, loans to borrowers with 620 FICO scores or less represented a 2.68 percent of the overall loan volume, and a 3.4 percent share of the counts, the Urban Institute said.

The market share of subprime loans has remained roughly the same, at low levels, for the past two years, Goodman said. These totals reflect loans purchased by Fannie Mae and Freddie Mac, and the government loan programs backed by Ginnie Mae.

“Undoubtedly, there are some loans outside the system, but the numbers are tiny,” Goodman said.  

California mortgage originator Joe Parsons said lenders have been willing to lend to borrowers with patchier credit for the last few years, particularly through the government loan programs with looser guidelines. But, he said, fewer such borrowers have applied.

“I think this is largely attributable to consumers’ perception that standards are higher than they really are,” said Parsons, who blogs about the mortgage industry. “Most loan originators derive their living from commissions, so I’d be very surprised if anyone was reluctant to work with a low-score borrower if they thought they could get them approved.”


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