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Subprime Slowly Expands, Though Not for HELOCs

Residential lenders are slowly wading back into subprime lending, though less so on lines of credit secured by borrowers’ homes.

First-mortgage lending to subprime borrowers during the five months ended May 31 was up 31 percent from the same period last year to 143,800 loans.

In general, subprime borrowers on residential loans are considered to be those whose
credit risk scores fall below 620.

That was according to
the National Consumer Credit Trends Report from Equifax.

business accounted for nearly five percent of the total 3.26 million prime and non-prime first mortgages made this year.

Still, subprime share on first mortgages stands well below the more than 10 percent in 2008.

“Despite the continuing rise in overall subprime originations, banks are still greatly limiting their high-risk exposure,” Equifax Chief Economist Amy Crews Cutts stated in the report. “The credit score of the borrower at the 10th percentile of newly originated first mortgages today is 650.”

The rise in lending to subprime borrowers could be impacted by companies like JPMorgan Chase & Co. that have grown wary of government lending.

In an interview with CNBC, Kevin Watters, chief executive officer of Chase’s mortgage banking business, said that the company considers lending through the Federal Housing Administration to be subprime lending.

“And we’re not in the subprime lending business,” Watters said.

Like with first mortgage lending, subprime home-equity loan production moved up 30 percent on a year-over-year basis to 30,900, Equifax said. At the same time, overall HEL originations was up just 22 percent — though that was the highest volume since 2008.

Subprime share of the overall HEL market currently stands at less than two percent, though it is rising.

The average subprime HEL amount was $22,455 during the most-recent period, climbing 12 percent from one year prior.

Even home-equity line of credit lending to borrowers with low credit scores was up — climbing by a fifth from a year earlier.

Although gains are being made in subprime HELOC originations, subprime lending remains just a fraction of overall originations and stands nowhere near pre-recession levels.

For instance, of the
more than 525,000 HELOCs closed during the first five months of this year, just 7,800 were subprime.

In addition, new subprime HELOC borrowers saw a 22 percent decline in borrowing power compared to last year — with average credit limits falling to $35,643. At the same time, overall HELOC credit lines to prime and subprime borrowers increased eight percent to $103,588.

Crews Cutts noted in the report that while there is hardly any subprime HELOC lending happening, first-mortgage and HEL subprime share is rising.

She said that credit scores for borrowers at the 10th percentile of newly originated HELOCs is 700 versus 575 in early 2006 — leaving the HELOC market in a credit environment that remains too tight.

But Crews Cutts remains cautiously optimistic
about the overall lending environment.

“It appears that American lenders still believe in second chances, and without subprime loans, there would be no second chances in the housing market,” Crews Cutts said. “The underwriting on mortgages today is tough on everyone and we believe that the subprime lending that is happening is being underwritten even more carefully.”

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