Much has been written already about the banking crisis and subsequent Great Recession in 2007. Many of the greatest economic theorists of our time point the finger of blame at subprime mortgages as one of the chief causes of all the chaos, which is why many have also thought that subprime mortgages would never return to the real estate market.
Today, the current housing market is proving some theorists wrong. In 2015, subprime mortgages are reemerging, and becoming more popular.
Subprime Mortgages Can Increase Profits for Real Estate Investors
In this article, we are going to discuss subprime mortgages, which is an important topic for real estate investors who sell homes. Then in future articles, we are going to discuss the return of stated income mortgages, and have an entire article to introduce how real estate investors can profit with the increased availability of these types of mortgages.
In general, though, subprime mortgages and stated income home loans more broadly open the homebuying market to demographics that have been largely shut out for years.
What is a Subprime Mortgage?
The definition of a subprime mortgage is changing quickly, and it’s important to redefine what subprime mortgages look like in 2015.
Traditionally, subprime mortgages were made to borrowers who could not qualify for a traditional mortgage because of poor credit history. There were some guidelines in place for making subprime mortgages, as lenders typically would make loans exclusively to repackage them and sell them off to Fannie Mae and Freddie Mac. But these guidelines were notoriously loose, and many people qualified who were unable to make the payments.
In 2015, subprime mortgages look a lot different. BlownMortgage.com, in noting the resurgence of subprime lending, points to an important distinction between subprime mortgages then and now. Today, mortgages are being made again to individuals with credit too low to qualify for traditional mortgages, but there are much stricter repayment clauses in place. Borrowers need to prove that they will be able to make payments in the future, as well as the present, before a lender will issue a subprime mortgage.
Portfolio Lending And The End of “Repackaged” Subprime Mortgages
Another substantial difference between subprime mortgages before the housing crash and today is that subprime lenders are not repackaging those loans and selling them to Fannie Mae and Freddie Mac. Today, Fannie Mae and Freddie Mac aren’t interested in buying the same types of subprime mortgages that led to the crash. So, intermediate lenders are taking a different approach, and making “portfolio loans” the new norm in subprime lending.
Today, when a lender makes a portfolio loan, it is approving the mortgage knowing it will remain in their own portfolio and must produce a profit for the institution. Lenders are financing subprime mortgages to hold them and make a profit, not to sell them off; therefore, subprime lenders have higher lending standards than before the 2007 housing crash.
Borrowers and Subprime Mortgages in 2015
Subprime mortgages are again an option for homebuyers with poor credit in 2015. Interest rates will be higher than with conventional mortgages, but for many individuals, a subprime mortgage is still the best option for securing a home. Borrowers that may have defaulted in the past can still qualify for a subprime mortgage with many lenders, though it won’t be as easy to qualify as before the 2007 crash.
Positive for the Housing Market
Ultimately, the return of subprime mortgages can be positive for home sellers and buyers, which means it can be a positive for real estate investors.
Watch for our upcoming articles as we explore taking advantage of this pent up demand as an increasing number of people have access to home financing.
Graystone Investment Group
Graystone Investment Group is an experienced Investment Group wholesaling properties in the Greater Tampa Bay market.
Unlike other wholesaling groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.