“Subprime has somewhat of a negative connotation from years past, and obviously from the mortgage meltdown,” said Tom Hutchens, senior vice president of sales and marketing for Angel Oak Mortgage Solutions. “However, the big message is that today subprime looks nothing like the subprime of old. Once people understand the differences, they realize that the new subprime is smart and responsible.”
Angel Oak Mortgage Solutions focuses exclusively on non-agency loans – subprime or non-QM
loans that don’t fit the guidelines set out by the government, Fannie Mae or Freddie Mac. And the new subprime – the kind of loans made by Angel Oak – isn’t like the subprime of old.
In 2006, for instance, the average credit score for a subprime loan was 580. Now it’s between 670 and 680. In the past, many lenders didn’t require any money down or proof of income. Today, Angel Oak requires at least 10-20% down and a fully documented ability to repay. So what kind of borrower might benefit from this new subprime loan?
“The majority of them have had some kind of credit or life event – perhaps a foreclosure or short sale
or something to that effect,” Hutchens said. “That’s really what we’re seeing right now – those who’ve had some kind of credit event (in the past). … The biggest advantage is that the only loans that have been available since the crash are agency – Fannie Mae, Freddy Mac – or government, FHA
. Those were the only mortgage loans that have been available to the consumer. Those are pretty tight boxes, and if you don’t fit those boxes perfectly, you don’t have an opportunity to buy a home.”
Nonprime loans open that opportunity up to a broader customer base – and do it safely for the lenders. Angel Oak began offering subprime loans in earnest in 2014; in thousands of originations since then, they’ve seen just two foreclosures.
That’s not to say that offering subprime loans is right for every originator.
“I think everyone has to decide what’s best for them,” Hutchens said. “We’re committed to it – it’s all we do, which is a really huge differentiator as opposed to an agency who does agency and government loans and also does non-agency. That’s a really different mindset. This is what we do all day, every day, so we’re truly experts and leaders in the space.”
But if subprime is right for you, it can be a great asset, Hutchens said.
“This is a way for people to grow their business in what many are predicting will be a shrinking mortgage market,” he said. “Once rates start to rise, the mortgage market usually takes a significant hit. This is a way to weather that storm, so to speak. It’s a way for someone to grow their business and generate new leads and new business.”
During the mortgage meltdown and the ensuing financial crisis, the term “subprime” became something of a dirty word, conjuring images of reckless loans made to people who were never going to be able to repay them. But subprime loans, in and of themselves, aren’t dangerous products. Made responsibly, they can be a valuable addition to a broker’s toolkit.