Prime vs. Subprime

At a time when subprime loans are increasing as a share of the mortgage market, the borderline between prime vs. subprime is becoming less and less clear. Several recent developments in the industry highlight this trend.

In April, representatives of the Mortgage Bankers Association, National Association of Mortgage Brokers and National Home Equity Mortgage Association all shared a podium during NHEMA's annual meeting, and leaders of all three organizations say they are in greater alignment on issues than ever before. The days when the MBA - the industry's largest trade group - focused almost exclusively on prime lending are long over. Today, prime and nonprime lenders often find common ground rather than intra-industry differences. Indeed, the days when companies focused exclusively on the prime or nonprime business may be coming to a close as well, with most of the largest players in the industry offering loan products suited to prime and nonprime borrowers.

But on the servicing side of the business, subprime is still a "high touch" segment of the business that requires more servicer time and attention than prime loans, with the expectation that delinquency and default rates will be considerably higher. Recent data continue to bear out that expectation.

The MBA, which has started breaking out prime and subprime data in its quarterly delinquency survey, said the subprime mortgage delinquency rate remains considerably higher than the delinquency rate on prime loans. But then again, it is actually lower for nonprime conforming loans than it is for loans insured through the Federal Housing Administration, which is one reason some in the industry have dubbed the FHA the "government's subprime" loan program. At the end of last year, 11.63% of subprime loans were at least 30 days delinquent, compared to 2.47% for prime, conventional loans and 13.18% for FHA loans. And MBA chief economist Douglas Duncan advised that the share of subprime loans in the marketplace has been increasing in recent years, a factor that could put upward pressure on the overall home loan delinquency rate.

The growth of that market has been a boon for the industry, but it will only remain a positive factor as long as servicers can manage the performance of these loans so that they remain economically beneficial long after origination.

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