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Subprime Will Return, Alt-A is Dead

Like a Phoenix rising from the ashes, Subprime lending will make a comeback. Lenders focus on the three Cs: Creditworthiness, Capacity, and Collateral. Creditworthiness is measured by one's FICO score, Capacity is based on one's income, and Collateral is the value of the property the loan is being written against. The subprime lending business model was originally intended to take people with poor FICO scores that had good income and savings and give them bridge financing until they could repair their FICO scores and refinance into conventional loans. This business model will probably return in a few years as there will be many people in this category due to the crash of prices in the Great Housing Bubble.

Alt-A loans, which include stated-income, high combined-loan-to-value, and low or no-doc loans, will probably not make a comeback. Alt-A turned Subprime upside-down: its business plan was to take people with creditworthiness (high FICO scores) and ignore their capacity or equity collateral. Alt-A loans simply created a new batch of subprime borrowers when people with creditworthiness defaulted in large numbers.

So where does that leave the housing market? Without Alt-A, people will not be able to get the loans necessary to support inflated prices. Buyers will actually need to qualify for loans based on their real income, and they do not make that much money. And since many previously Alt-A borrowers have defaulted and are now Subprime, and since Subprime is currently defunct, the buyer pool has gotten much, much smaller.

Once prices bottom, subprime will likely make a resurgence. During the next cycle people might forget why subprime blew up, and there will be many who say, "It is different this time." We can only hope they are correct.

Article Source: http://youridahorealestate.com

Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall? Learn more and get FREE eBooks at: www.thegreathousingbubble.com/ Read the author's daily dispatches at The Irvine Housing Blog: www.irvinehousingblog.com/ Visit Subprime Will Return, Alt-A is Dead.

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