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The Return of Subprime Scamming

This seems like a brilliant idea from the folks who brought you the financial crisis:

After years as the lending market’s undesirables, aspiring home buyers with less-than-stellar credit are being offered home loans again—with some of the same conditions and catches critics say tripped up subprime borrowers five years ago.

According to analysts, a handful of private investment firms have started making home loans to borrowers who fail to meet banks’ requirements, which got tighter post-crash and have largely stayed that way. And for now they are holding them on their books, which is novel. At least two, Athas Capital Group, of California, and New Penn Financial, which is owned by Shellpoint Partners, of New York, are also making jumbo loans, or loans in most parts of the country that exceed $417,000, as the federal government appears to be scaling its support of that market.

The loans are designed to include borrowers with credit scores deemed low by banks’ standards; they also have more-flexible requirements for proof of income. Banks have been too slow to extend credit to such people, the firms say, leaving otherwise responsible borrowers out in the cold—and potential profits on the table. “It’s often a minor detail, why banks won’t approve them,” says Brian O’Shaughnessy, chief executive at Athas Capital.

The good news is that so few people are buying homes right now that there are less of these loans in circulation. But that’s just for now. Mortgage brokers are finding that the “sucker born every minute” philosophy propounded by P.T. Barnum is actually what keeps their industry afloat. The cash for these loans is coming from private investment firms rather than the big banks, which cannot securitize the loans as easily as during the bubble, because that market is practically frozen.

Still, you can see these loans to borrowers with low credit schools as gateway drugs. It won’t be long before more credit-worthy borrowers will be given the same terms, option ARMs with exploding rates after two years and the like. This scam worked for many years before nearly taking the financial industry down. There’s no reason why the mortgage industry won’t think it’ll work again, at least to goose short-term profits.

These loans reportedly require a higher down payment, and actually require some documentation, as opposed to the no-doc or liar’s loans of the past. And to be sure, Dodd-Frank made some of the worst practices of the industry illegal. But many of the practices were illegal before. It didn’t stop anyone.

And keep in mind that this is happening while the servicing industry is still abusing its clients, foreclosing without proper documentation and ripping off borrowers with fee pyramiding. Not to mention that the industry feels there is an imperative to speed up foreclosures. What does that mean for people who take out these loans if and when they get behind?

I could see a lot of liberals who value homeownership as a means of wealth creation agreeing with Athas Capital Group and New Penn Financial and other private investment firms who are letting some borrowers shut out of the system to gain access to credit. They are providing a ladder to the middle class, they would say. I see it as nothing more than a ladder to financial ruin.

…I should add that this is why we need a Consumer Financial Protection Bureau, to end this kind of abuse of the borrower. But the Obama executive order on “look-back” regulatory reform will tie up agencies like CFPB with needless pruning of old regulations, when the looming crises demand new ideas. It’s just a waste of time and effort.

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David Dayen

David Dayen

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