First mortgage originations for subprime borrowers increased steadily from January 2015 to October 2015, according to the latest Equifax National Consumer Credit Trends Report.
During that same period, more than 312,000 new mortgages were originated, totaling $50.7 billion. This represents an increase of 28% in the number of first mortgage originations and a 45% increase in the total balances compared with the same period a year earlier (January 2014 to October 2014).
By “subprime,” Equifax means consumers with an Equifax Risk Score of 620 or below. However, these loans in no way resemble the sloppily underwritten subprime loans that caused the financial crisis.
“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,” says Amy Crews Cutts, chief economist at Equifax, in a statement. “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.”
The industry is also seeing an increase in subprime activity within the home equity market, with the total balance of home equity installment loans originated for subprime borrowers increasing to more than $1.4 billion, a year-over-year increase of 32.7%, according to the report.
“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,” Cutts says. “Conversely, [home equity lines of credit] are generally more popular among consumers but less accessible to subprime borrowers. Mortgage insurance is a viable alternative for home equity loans that might be used as piggy-back financing for part of the down payment on the first mortgage and may explain why we are not seeing similar proportionate increases in subprime home equity loans.”
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