Equifax: Subprime mortgage origination on the rise
This time with better underwriting
While first-mortgage originations for subprime borrowers are growing, it’s not the same faulty mortgages that plagued the financial crisis, as lenders heighten their focus on consumers’ ability to repay.
"While there are many characteristics that define a subprime loan, such as the specific terms of the loan and the lender who issues it, credit standards are becoming more accommodating to meet market demand," said Amy Crews Cutts, chief economist at Equifax.
"At the same time, lenders are focusing more attention on evaluating consumers' ability to repay. This has led to a much larger reliance on third-party data verifications that enable lenders to more accurately vet subprime borrowers much earlier in the origination process,” said Cutts.
According to data from the latest Equifax National Consumer Credit Trends Report, first-mortgage originations for subprime borrowers, consumers with an Equifax Risk Score of 620 or below, have shown steady growth from January to October 2015, with more than 312,000 new mortgages originated, totaling $50.7 billion.
This marks a 28% increase in the number of first mortgage originations and a 45% increase in the total balances from the same time a year ago.
Meanwhile, the report said the industry is also witnessing an increase in subprime activity within the home equity market.
The total balance of home equity installment loans originated for subprime borrowers increased to more than $1.4 billion, a year-over-year increase of 32.7%, the report stated. Total credit limits on home equity lines of credit (HELOCs) also reached $608 billion, a year-over-year rise of 6.8%.
Cutts explained that home equity installment loans are often more suitable for consumers with credit issues, but the regulatory costs and underwriting burdens have typically made them very expensive for lenders to originate.
Conversely, she said, “HELOCs are generally more popular among consumers, but less accessible to subprime borrowers.”