On paper, a revival in sensible subprime lending—the operative word being “sensible”—sounds like an idea whose time has come again. During the financial meltdown of the past three years four million households have lost their homes and thanks to a nearly 10% unemployment rate, credit scores have been scorched.
In short, millions of potential subprime borrowers have been created. Some of these victims may desire to buy or refinance a home but under the “new” super conservative mortgage industry—where tight loan standards are the norm—no one will lend them money.
And depending on who you are, maybe that’s not a bad thing. Maybe, people who are just now repairing their credit histories should rent, sacrifice, and wait for better days. But back in the 1960s a whole industry was born where consumer finance companies with names like Aames, Beneficial and Household Finance would lend home owners money (usually second liens) because despite having not-so-great credit they had something that was more valuable: home equity.
In the 1960s and 1970s the lending strategy was simple: if the homeowner didn’t pay his loan, the finance company took the house because there was enough equity in it to at least break even.
And now with both Democrats and Republicans talking about whittling down Fannie Mae and Freddie Mac and getting government as far away from housing finance as possible the question begs: is now the time for a revival in subprime (consumer finance, hard money, home equity, call it what you will) lending?
During the height of the housing boom, 2005, subprime lenders funded $800 billion a year in product. In 2010, at best, $100 million in subprime loans were written—with most of it being funded by “hard money” firms charging 10% with four points upfront and a maximum LTV of 60%.
Even though subprime lending blew a huge hole in the U.S. economy there continues to be a school of thought that such an industry is needed and desirable as long as it’s done correctly, and conservatively. But will it happen, and if so, will it happen soon?
Some point to a plan by the U.S. government and a group of private investors to spin off the subprime lending and servicing division of American International Group as a positive development for the industry’s revival. According to a recent SEC filing, the unit, which is called Springleaf Financial, hopes to sell $500 million worth of stock to the public through a REIT structure.
But there’s a rub: Springleaf, formerly known as American General Finance, has hardly made any new loans through its 1,100 retail branches the past three years, though it continues to service a $13 billion portfolio of mostly nonprime residential loans.
Its S-11 filing is chock full of thoughts as to why its prospects look so good, including an estimate that its target market is 78 million strong, a potential customer base that includes both home owners and consumers looking for car loans, personal loans and other short-term notes.
And why does Springleaf believe it will be successful? Answer: because unlike the crazy Wall Street-owned firms that originated loans during the past decade it plans to re-underwrite every mortgage it makes with branch employees being held “responsible for servicing and collecting on each loan.” In other words, it plans to do exactly what Beneficial and Household (and AmGen) did many decades ago.
But will Springleaf fly? And will investors belly up to the bar to buy its shares if and when they come to market? Rick Baldwin, a veteran hard money/subprime lender, told National Mortgage News recently that “people are once again talking about hard money.
“The need is massive but any new players won’t get near LTVs of 80%.”
