“The way I’d say it is, this is a proven, base level of
credit risk for new mortgages,” Raneri says.
Fannie Mae and Freddie Mac may have the largest
influence on subprime borrowers. Since Fannie and
Freddie require a minimum FICO score of 620, the
riskiest loans must find financing elsewhere. That’s a
180-degree turn from the prerecession period, when
these government-sponsored enterprises were actively
purchasing subprime and Alt-A loans through the
RMBS market, Slump says.
Nonprime lenders cater to borrowers with FICO scores
below 620; major credit dings, such as a foreclosure or
bankruptcy; or self-employed or unemployed individuals who have to rely on asset-depletion formulas to
qualify for a loan. Still, the loans being originated under
these programs often exceed the minimum guidelines.
“A loan officer is not going to spend a ton of time on
a loan, only to have the loan rejected,” Slump says.
One avenue for subprime loans is through the Federal
Housing Administration (FHA), which sets its credit-score floor at 500, or 580 for borrowers who wish to
make the minimum downpayment of 3. 5 percent.
FHA loans, however, often mitigate the risk through a
maximum debt-to-income ratio, or DTI, of 43 percent.
Nothaft’s antennae were raised by fourth-quarter
2016 numbers from the Mortgage Bankers Association,
which showed that FHA-loan delinquencies jumped
for the first time in a decade, largely stemming from
FHA’s underwriting guidelines are “more generous,
more liberal,” than other programs, he says, and its
Ask three different industry experts about subprime mortgages and it’s possible to get three different responses on what the term “subprime” really means.