Small Lenders Bend for Risky Borrowers

Borrowers with minor imperfections on their credit applications — like a brief loss of employment or a temporary dip in their credit score — are starting to have better luck at snagging a loan with smaller lenders, Bloomberg reports. At least 15 smaller firms this year are offering slightly riskier mortgages, which in some cases come with higher interest rates and larger down payment requirements and aren’t backed by the government.

 “Some lenders became afraid of their own shadows,” RPM Mortgage Inc. Chief Executive Officer Rob Hirt told Bloomberg. The bank started a program this summer for borrowers who have higher debt burdens or who had sold a home for less than the outstanding mortgage. “The market is beginning to realize that if you make smart and sound loans to people who don’t fit in the narrow box, it doesn’t make them a worse risk.”

On the other hand, larger banks, like Bank of America and JPMorgan Chase & Co., have generally tightened their credit standards over the last few years. The average score on mortgages that government-controlled Fannie Mae and Freddie Mac bought now stands at about 740 – well above the 660 level that is considered subprime. Some of the big banks are reluctant to ease their credit standards, concerned that Fannie, Freddie, and the FHA will force them to buy back bad loans with underwriting errors; the banks do not want to take on the risks of loans that the government programs won’t insure, Bloomberg reports. The lending giants from 2006 through 2012 faced more than $200 billion in losses from home loans, according to Moody’s Analytics data.

But where big banks are stepping back, small banks are stepping in. For example, Shellpoint Partners LLC’s New Penn unit began this summer to offer mortgages for home buyers with debt-to-income ratios up to 55 percent and interest-only loans when borrowers have “high disposable income” or “high income potential due to their line of work.” Lone Star Funds’ Caliber Home Loans Inc. also debuted this summer new programs that offer flexibility for foreign nationals and on purchases of condos without approval for government programs. TD Bank’s Right Step program allows borrowers to put 3 percent down and not have to pay mortgage insurance if they have credit scores of 660 or above. Banc of California is providing loans to borrowers who have a foreclosure or late payments on their records, as long as they can make a down payment of at least 20 percent and show other strong assets in their finances.

“To us, it’s common sense,” says Jeff Seabold, chief lending officer at Banc of California. “There’s quite a few people who are boxed out that shouldn’t be.”

Source: “You Don’t Need to Be Perfect to Get a U.S. Loan Anymore,” Bloomberg Businessweek (Oct. 13, 2014)