It’s been a good year…for subprime mortgage lending. Yep, mortgages for borrowers with credit scores below 620 are growing like gangbusters, this according to the most recent National Consumer Credit Trends Report from Equifax.
The credit bureau noted that first mortgage originations to subprime borrowers were up 30.5% over the first five months of 2015 compared to the same period a year ago.
Additionally, subprime home equity loans were up 29.5% from a year ago and HELOCs were up 20.4%.
Still Just 4.6% of Total Volume
However, the number of subprime loans as a percentage of all mortgage loans is still quite dismal compared to pre-crisis numbers (which is probably a good thing!).
Just 143,800 of the roughly 3.26 million first mortgages originated this year through May went to consumers with credit scores south of 620.
That represents just 4.6% of all mortgages doled out during that period. If we look back at 2008, when mortgage lending was more like the Wild West, subprime accounted for more than 10% of origination volume.
It’s even worse if you look at second mortgages, including home equity loans and HELOCs.
Virtually nobody with a sub-620 credit score is getting their hands on a HELOC, per the report.
More than 525,000 HELOCs were handed out to homeowners through May of this year, but just 7,800 were considered subprime at origination. That’s less than 1.5% of total volume.
It’s unclear if borrowers with subprime credit scores aren’t aware they can get a HELOC, or if so few lenders actually offer the product.
In any case, those who did get a HELOC with a sub-620 score weren’t exactly flush with cash.
These homeowners saw a 21.5% decline in borrowing power from a year earlier as the average credit limit fell to $35,643. This is strange given the rise in property values since that time, perhaps an indication of tightening among lenders.
Compare this to the average credit limit of $103,588 for all HELOCs, which was 7.5% higher than that seen in May 2014.
If You Want Your Equity, You Better Have Good Credit
Long story short, if you want to tap your home equity you need a good credit score. Otherwise you’ll need to sell your home to get your cash, or settle for an unattractive interest rate.
This is yet another reason to really think before you dump all your cash into your home and attempt to aggressively pay it off early. It can make a lot of sense, but it can also lock up all your liquidity.
Equifax Chief Economist Amy Crew Cutts said in the release that despite the rise in subprime originations, the credit score of the 10th percentile loan is 650 today. That means 90% of mortgages go to borrowers with scores above 650.
For HELOCs it’s 700, meaning just 10% go to those with scores below 700.
Back in 2006, these credit scores were 575 and 645, respectively, so credit is still very tight relative to the boom. Again, for good reason…
Overall, home equity loan lending across all credit scores was up 22.4% from a year earlier to its highest level since 2008, so it’s clear folks are beginning to take advantage again as home prices rise. Of course, CLTV limits are a lot lower than they once were, thankfully.
If you do take out a HELOC, watch out for the Fed as it hikes interest rates. Once they finally take action, the move will increase the prime rate and your HELOC rate along with it.
Not sure if this is a good thing or a bad thing. I think on this round subprime might be able to last a little longer since things are so scrutinized.
30.5% is a big jump, but with the total percentage of subprime loans still under 5%, it’s probably not a big concern – yet anyways. It’s a trend definitely worth monitoring though.