High-Risk Game: New Entrants Vying for Vacant Spots in Subprime Lending
As major Wall Street banks and federal regulators have stepped in to close off available funding to many of the nation's largest subprime mortgage lending operations, other would-be players with dreams of making it big in the subprime market are moving quickly as part of an attempt to gain market share. It's a move the companies involved are painting as one part visionary, one part caring for the subprime borrower. Many industry insiders, however, say the moves are poorly-timed and even more poorly-conceived. Southfield, Mich.-based Creative Mortgage Lending and Clarksdale, Ind.-based Superior Development Group, Inc. are two examples of a new breed of lenders making an attempt to put a dent in a market they see as ripe for entry. Creative Mortgage Lending has been putting on a PR blitz since February, trumpeting its range of exotic subprime mortgage products -- products once offered by numerous other lenders, but now nearly extinct due to poor market conditions. The company has operated on a smaller scale for more than 20 years and is backed by a private equity firm -- perhaps the last bastion of risk-taking left in subprime credit -- although company officials will not identify their funder. CML has been touting its range of subprime, adjustable-rate mortgage options, including a "hybrid" pay-option ARM that allows borrowers to choose their payment. Pay option ARMs have long been a target of consumer advocates, who say that borrowers choosing the lowest payment over time will find themselves owing more on their mortgage than their house is worth -- particularly as the broad U.S.-based housing slump has continued. Industry insiders don't see much of a future for the company's current efforts. "Right as the dot-com bubble burst, there were plenty of companies who thought they could go public because there was less competition for their product," said one source, who asked to remain anonymous. "They were wrong." Another source was more blunt, and said the company will face a fate similar to others in the subprime industry. "What makes a small subprime lender think they're going to be able to originate a negative amortization subprime loan better than absolutely anybody else in the market, especially given current market conditions? I don't care who their private funder is -- that funder must want to burn money." CML co-CEO and co-president John Sanger, however, characterized the loans as a way to offer troubled borrowers help when their usual funding sources have dried up. â€œThis is another step in helping brokers become borrower advocates,â€? he said. â€œThe Hybrid Pay Option ARM also helps borrowers make the right financial choices for themselves.â€? Lease-to-own makes a comeback Other attempts to grab market share in the new world of subprime lending involve re-focusing on alternative products that have existed for years. Indiana-based Superior Development Group said Wednesday that it will begin offering a lease purchase program to subprime borrowers as an alternative to more traditional financing. Lease purchase programs, common in loss mitigation efforts, allow a borrower to lease and occupy a property while having a contract to purchase the property for a set amount at a predetermined time in the future. â€œThe lease purchase program will become a very popular way to sell or buy a house because of the meltdown in the subprime mortgage lending market, which is causing the housing market to struggle as well," said Derrick Neal, president and CEO of Superior Development. Neal isn't afraid to mix in his big dreams for Superior's role in the subprime market, either. "[Our program] will help replace an unforgiving struggling subprime lending market and also help stimulate a sagging housing market," he said. FHA, relevant again? Nonprofit organizations are jumping in to the mix as well, touting the benefits of FHA subprime loan assistance programs that, until very recently, were derided as outdated and in need of overhaul by many in the industry. Maryland-based nonprofit AmeriDream Inc. is touting its downpayment assistance program, which it characterized in a recent press statement as "the perfect choice today for individuals and families trying to achieve the dream of homeownership." The company provides down-payment assistance to borrowers who qualify for FHA-insured mortgages. "We believe that every family in America deserving to achieve the dream of homeownership should have the opportunity to do so," said AmeriDream CEO & president Ann Ashburn. "Our goal is to remove one of the biggest barriers to homeownership - funds needed for a mortgage down payment. We do it by providing down payment assistance to low and moderate income individuals and families." Ashburn also said she believes that FHA mortgage programs were unfairly brushed aside by lenders pushing more exotic loans. A recent press statement by the organization claimed that FHA loans were a perfect alternative for subprime borrowers, saying that the FHA offered "many options to help keep [troubled] borrowers in their home and avoid foreclosure."