Subprime mortgages gained notoriety as a key contributor to the financial crisis, but a safer version of the loans is gaining popularity in response to tight underwriting that has blocked millions of Americans from homeownership.
Subprime accounted for about 15 percent of all new home loans in 2005 and 2006, but it makes up only about 0.5 percent today. “We call it the sane subprime,” said Brian O’Shaughnessy, CEO of the Athas Capital Group, one of the few lenders that offer the product. He says his lending standards are more flexible, but generally tougher, than those of the FHA -- which permits down payments as small as 3.5 percent. The Athas rate sheet shows that borrowers with credit scores between 550 and 600 must put at least 35 percent down for an interest rate from 8.99 percent to 12.99 percent. The lender also require documentation of a borrower's income or assets and an evaluation of his or her ability to repay.
Economists and consumer groups have called on lenders to make credit more widely available. “Not all subprime lending is abusive. It just happened that all of the abuses happened in the subprime space,” said Nikitra Bailey, an executive vice president of the Center for Responsible Lending. “The regulators now have to be really vigilant to make sure people are getting appropriate loans and they don’t allow the subprime market to get back out of hand.”