They’re baaaaaack!

Subprime mortgages, the financial equivalent of a dark destructive force, have returned to the American home industry, which was devastated last decade by this type of loan.

These home loans, intended for people with poor credit, are once again taking their place in the market, only this time under more regulatory control and occupying (so far) a much smaller share of outstanding mortgages.

Experts now call them “sane subprime” loans, thanks to the tougher standards imposed in the wake of the financial collapse and the resulting Great Recession. Some lenders even say the new regulations are too tough.

“If you’re self-employed, you’re hosed,” William Dallas, who runs sub-prime lender New Leaf Lending, told The New York Times. “If you just started a job, you’re hosed. If you get a bonus, you’re hosed. Just got a severance payment? Can’t count that. I don’t have to do a lot to be a lender. I just have to be normal.”

Subprimes currently make up only 0.5% of the home-loan market, considerably less than the 15% share they did back in 2005-2006, in large part because few lenders are even offering the 2.0 versions.

Borrowers with low credit scores (generally in the 550-600 range) must put up a substantial down payment, at least 35%, to qualify for new subprimes and be willing to pay interest rates from 8% to 13%. Conventional mortgage holders these days pay about 4%.

“Not all subprime lending is abusive. It just happened that all of the abuses happened in the subprime space,” Nikitra Bailey, an executive vice president of the Center for Responsible Lending, told the Times. “The regulators now have to be really vigilant to make sure people are getting appropriate loans and they don’t allow the subprime market to get back out of hand.”

-Noel Brinkerhoff

To Learn More:

In Home Loans, Subprime Fades as a Dirty Word (by Shaila Dewan, New York Times)

They Wounded the Economy, but Now Subprime Mortgage Securities are Back (by David Wallechinsky and Noel Brinkerhoff, AllGov)