Nearly a decade after the collapse of the subprime mortgage market wrecked the US economy and ushered in one of the worst financial crises in modern history, lenders are once again courting borrows with less-than-ideal credit, the Wall Street Journal reports. And while post-crisis regulations have generally prevented the largest banks from reentering this market, smaller mortgage brokers who work to connect non-bank lenders with borrowers are leveraging their experience in writing these incredibly risky loans – a practice WSJ glibly describes as “a lost art" - to help revive their dying industry.
Fundloans, a mortgage broker that specializes in subprime lending, is building a team of twenty-somethings who were in high school when the crisis struck – a team that includes 25-year-old Brandon Boyd, who left his job as a salesman at a Calvin Klein outlet to join the firm after its founder, Jon Maddux, recruited him off the store’s showroom floor. Here’s WSJ:
Brandon Boyd was a high school junior during the financial crisis. Now, the former Calvin Klein salesman is teaching mortgage brokers how to make subprime loans.
Boyd, a 25-year-old account executive at FundLoans in a beach town outside of San Diego, is at the cusp of effort to bring back an army of salespeople who once powered the mortgage industry and, some say, contributed to the housing crisis.
"I knew a mortgage was a loan for a house,” said Boyd, who was recruited by his boss, Jon Maddux, after selling him a Calvin Klein suit at a local outdoor mall. “I came in just a blank slate.”
Mortgage brokers were vilified during the crisis for their shoddy lending practices, which included falsify loan applications. Today, most banks won't work with brokers because they're too difficult to monitor.
Instead of banks, it's small and midsize independent lenders who are helping to revive the once-moribund mortgage broker industry. Nonbank lenders that typically cater to riskier borrowers say they need brokers to fan out across the country and arrange mortgages to people with lower credit scores, or who can’t prove their income through a typical tax return.
These lenders, a cohort that includes hedge funds and private equity firms that are more lightly regulated, are helping to fill a void left by traditional banks that will only lend to borrowers with stellar credit.
Subprime mortgages are typically made to borrowers with a credit score of around 660 or lower, at interest rates ranging from 6% to 10%. Alternative documentation loans, or Alt-A loans, are made to borrowers with higher credit scores but who use bank statements or other less conventional ways to prove their income, as WSJ dutifully explains. But subprime isn’t the only avenue for growth that mortgage brokerages see: As nonbank lenders comprise a growing share of the market, they’re relying once again on brokers to bring them business of all kinds. During the first quarter, nonbank lenders accounted for about half the mortgages originated in the U.S., according to data from industry publication Inside Mortgage Finance cited by WSJ.
To be sure, the subprime market is still nowhere near its 2005 peak, when lenders underwrote $1 trillion in subprime mortgages. In the first quarter, lenders originated just $6 billion in loans to borrowers with subprime credit or "nonprime" credit. The latter category includes borrowers who must use alternative means - like bank statements - to verify their income, according to Inside Mortgage Finance. During 2016 as a whole, mortgage brokers originated just $22 billion in subprime loans.
During the first quarter of 2017, the total loan volume to borrowers with both good and subprime credit dropped to $37 billion, down about 34% from the last three months of 2016. But even though the the mortgage broker industry is still well below well its 2003 peak of around $1.1 trillion in loans generated, insiders see the rise in subprime lending as a harbinger of boom times ahead.
Lenders say there is an untapped market among borrowers with good credit scores like self-employed workers who don’t have proper income documentation, or for responsibly made loans to borrowers with credit problems that have had bankruptcies in the past or had to sell their home for less than it was worth.
If they are successful in recruiting brokers, lenders believe the market potential for both types of loans could reach $200 billion annually.
Steve Arnold, an account executive at Angel Oak Mortgage Solutions, one of the largest nonprime lenders, told WSJ that he is on the phone almost nonstop from 8:30 a.m. to 6 p.m. every day except Sunday coaching brokers on how to make nonprime loans.
“A lot of [the brokers] are timid and scared and don’t know where to start with the nonprime type loans,” said Arnold, who is based in West Palm Beach, Fla.
US real estate prices have continued to climb since the crash. But while housing valuations in certain urban markets appear to have spiraled out of control, real-estate in the US isn't nearly as dangerously overvalued as Canada and Australia, where valuations have soared thanks in large part to an influx of wealthy Chinese buyers looking to stash their wealth abroad.
Today, subprime auto lending has eclipsed the subprime mortgage market in terms of size, largely thanks to lenders' aggressive sales tactics. These loans, many of which are made to consumers with subprime credit, have been accounting for an increasingly large percentage of car saes across the US.
As of April, approximately $200 billion has been loaned out by auto lenders to consumers with subprime credit. Meanwhile, Morgan Stanley is projecting that used-car prices could crash by up to 50% over the next four to five years.
And with more than one million Americans already behind on their car loans, it’s easy to see the writing on the wall. The subprime debt problem in the US is rearing its ugly head once again.