This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Are Subprime Loans Getting a Second Act?

NEW YORK ( TheStreet) -- Coming soon from a mortgage lender near you: subprime loans.

Really? Weren't they banished to the dustbin of history?

Well, some types, such as the "liar loans" that required no proof of income, may be gone forever. But the idea of granting mortgages to people with less-than-perfect credit has a growing appeal for lenders.

"It won't be unfettered and there will be restrictions, but frankly, subprime lending will have to come back," says Keith Gumbinger, vice president of mortgage-information firm HSH.com, in a report on the firm's website.

Lenders' problem is that rising mortgage rates have made it unprofitable for homeowners to refinance existing mortgages, so refi applications have fallen off a cliff. Since refinancing has accounted for about two-thirds of mortgage applications in recent years, lenders must scramble to replace the lost business. Recent gains in home sales are simply not enough.

Rising home prices also make subprime loans less risky, as there's a better chance a home can be sold for enough to cover the mortgage if the homeowner runs into trouble.

Many borrowers, along with many in the real estate and home building industries, will welcome some loosening of the extremely tight loan standards implemented during the financial crisis. In recent years, lenders have required excellent credit scores, down payments averaging 20% and proof that income has been steady for years. Self-employed applicants, even with large incomes, have found loans very hard to get.

But the pendulum isn't likely to swing back to where it was in 2005 and 2006, when applicants' credit ratings didn't matter and loans could be had for zero down.

"Those mortgage loans were niche products to begin with and were intended for 2%of the market," Gumbinger said. "Unfortunately, they were marketed to 20% of the market, and that's when the problems started."

Among the various high-risk products of that freewheeling era, option arms are unlikely to return, HSH says. Those allowed the borrower to decide what size payment to make, with amounts below a minimum added to the loan balance.

But interest-only loans are slowly coming back, especially for large mortgages. These offer a low payment because there is no payment to principal, meaning the debt doesn't get smaller every month as it does with a conventional amortized loan.

Balloon-payment loans, which require a large pay-down of principal after a given number of years, may come back eventually, HSH says. No-documentation loans probably won't return in their old form, but may be replaced partially by loans that require proof of assets owned rather than proof of income.

Zero-down-payment loans are already returning, but this time the applicant must furnish proof of enough income to make payments.

So don't expect a return to the Wild West. But if you've been sitting on the sidelines, afraid you'd never get a mortgage, it's a good time to test the market. Credit restrictions are easing and mortgage rates are still pretty low.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $128.82 -1.20%
FB $78.97 0.00%
GOOG $558.40 0.00%
TSLA $203.34 0.00%
YHOO $44.28 0.00%

Markets

DOW 18,132.70 -81.72 -0.45%
S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs