Bad Credit Lenders are Still Around Although Getting Bad Credit Loans Might be Tougher
Mortgage Credit Problems Columnist
Anonymous Asks: I've heard that all of the subprime or bad credit mortgage lenders are out of business and that most people with bad credit wont be able to buy homes now. Is this true?
Gina Says: According to an article by Slate Magazine's Daniel Gross, those with bad credit have to look harder but are not completely out of luck. The biggest downfalls in the subprime lending industry were large institutions that engaged in a practice called "risk layering." For example, a borrower with poor credit represents an addition of risk to the lender. If he or she has no savings, that's another layer. And if there is no down payment and the new homeowner didn't even have to prove he had a job, that's a few layers too many. Crash!
But then look at companies like Clearinghouse CDFI (community-development financial institution). Since 2003, this for-profit firm based in Orange County--home to defunct giants like Ameriquest--has issued $220 million worth of mortgages in California--the epicenter of housing horror. More than 90 percent of its home loans went to first-time buyers, about half of whom are minorities. Last year Clearinghouse reported a $1.4 million pretax profit.
Community-development banks, credit unions, and other CDFIs--a mixture of faith-based and secular, for-profit and not-for-profit organizations--are the good guys--still going strong--the ethical subprime lenders. Even during the worst housing crisis since the 1930s, many of these institutions managed healthy payback rates. They haven't ripped off their customers or their shareholders. Nor have they rushed to Washington begging for bailouts.
Lenders in this field aren't touchy, feely social workers. To stay in business, they have to charge suitable rates--higher than those on prime, conforming loans--and manage risk properly--no stupidly crazy risk layering. So you can't expect to get a 100% loan and not prove your income. These lenders have goals that include improving their communities as well as making money, and throwing a bunch of properties into foreclosure won't accomplish either. The Opportunity Finance Network, an umbrella group for CDFIs that in 2007 altogether lent $2.1 billion, had losses of less than 0.75 percent. And predatory practices would never be tolerated. "If one of our employees pushed someone into a house they couldn't afford, they would be fired," says CEO Douglas Bystry.
Ethical subprime lenders have to look at people, not computer-generated printouts, when making lending judgments. Homewise, based in Santa Fe, N.M., which lends to first-time, working-class home buyers, decides based in part on whether borrowers have scraped together a 2 percent down payment. "If customers build a savings habit to save that money on a modest income, it says a lot about them and their financial discipline," says executive director Mike Loftin.
So there are bad credit lenders out there. Probably smaller institutions participating in community improvement plans, faith-based initiatives, or just run by smart people who didn't get greedy. Look for them online, in your neighborhood, and through community programs.
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