Nonprime lenders are an interesting group. They don’t always fund only nonprime loans. Their spreads on subordinate liens are actually a couple of basis points lower than those of prime lenders. And they fund a high percentage of manufactured housing.
Nonprime lender volume fell off by 10 percent in 2015 from 2014, according to an analysis of Home Mortgage Disclosure Act data in LendingPatterns™. But because they fund both nonprime and investment grade loans, you can’t just assume that nonprime lending is down in and of itself.
In fact it appears about a quarter of nonprime lender production was sold into the secondary market in 2015, with non-agency buyers taking the most and Ginnie Mae the federal agency with the highest percentage of the three, mostly from Federal Housing Administration mortgages. Nonagency investors bought 12 percent of production, and Ginnie Mae 10 percent. Agency MBS activity indicates the collateral (i.e. loans) meets standard underwriting guidelines. The collateral loans for private label MBS may or may not be underwritten according to agency specs.
An analysis of spreads shows that the percentage of loans with spreads reported (potentially an indicator of nonprime) was fairly even between 2014 and 2015. In 2014 there were 71,000 mortgages made by these lenders with spreads reported, or 79 percent of production. In 2015, these lenders made 69,000 loans with spreads reported, or about 85 percent of production.
In all, there were 81,000 mortgages made by nonprime lenders in 2015, for a total of $9 billion in finance, compared to 90,000 made in 2014. More than half of 2015 originations was used to finance manufactured housing.
And, it wasn’t easy to get money from these lenders in 2015. Just 27 percent of applicants saw their mortgages approved, with almost 40 percent denied. And a high percentage of applications, 20 percent, was never completed.
Lenders made fairly small amounts available as individual mortgages, as first liens averaged just $114,000 apiece and subordinate lien loans averaged $50,000. First liens dominated the category.
For LendingPatterns, the dividing line between a prime and nonprime lender is based on the percentage of loans with reportable spread (difference between calculated APR and APOR greater than 1.5% for first liens). If less than 51% of originations are without reportable spread, then the prime lender label is applied. If above 51 percent, call it a nonprime lender, generally.
Often, the spread information on LP reports is based on quite a low percentage of reported spreads, sometimes as low as five percent. Logically, here there should be a high percentage of reported spreads. And in fact, 86 percent of loans had reported spreads. For first liens, the spread was 4.59 percent, quite a bit higher than other cohorts I’ve reported on. But interestingly, on subordinate liens, the nonprime lender spread of 4.97 percent was a few basis points lower than those at prime lenders, 5.02 percent. However, less than three percent of nonprime lender production was for subordinate liens.
Minorities got 26 percent of loans from these nonprime lenders in 2015. Hispanics were the minority with the biggest percentage, 13 percent. Income levels tilted toward the lower end of the spectrum. Upper income borrowers, often more than half in many categories, made up just 27 percent of borrowers here. Low-mod borrowers got 39 percent of volume combined.
A high percentage of these loans (71 percent) went to purchase homes in 2015. Borrowers used the mortgage to refinance just 23 percent of the time.
Jumbo mortgages made up a quite small percentage of the total at three percent. Those that met conforming levels were the vast majority, at 97 percent.
Property type was led by manufactured housing, at 51 percent, followed closely by single-family, at 48 percent.
(Mark Fogarty is a journalist and analyst who has been covering the mortgage industry for more than 30 years.)