We’ll always have subprime products of some sort. During a tough market the subprime category will actually grom because of the problems people have when times are bad.
These lenders and investors aren’t having problems with their subprime portfolios because it’s some sort of illegitimate product. The problem is the way the lenders have been underwriting those borrowers. Subprime works great when they run it in a responsible manner:
Reduce the maximum LTVs in proportion to the borrower’s credit; and
Verify the borrower’s income and credit over a period of several years, not just the previous year; and
Use real appraisals that call it how it is, not how the loan originator wants it to be.
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If the most credit worthy borrowers are good to go at 100% LTV then the subprime borrowers shouldn’t be any higher than 80%, and that’s COMBINED loan to value (CLTV). Some of those borrowers shouldn’t be higher than 70% and the most marginal borrowers should be at 50%. They should be able to prove their income for at least 2 or 3 years. Those appraisals should be heavily scrutinized and anything that even smells funky should be tossed without recourse.
Do all that and those subprime loans won’t be that risky. Of course, those types of financing terms won’t prop up an overextended market, so there won’t be that many transactions in that category either.
