Mortgage loans for people with bad credit are nothing like what they once were. The bad credit-lending world used to be a free for all, with little regulation and little uniformity. However, this has all changed.
At the peak of our economy’s last boom, bad credit lending was a very attractive industry for lenders to enter into. Regardless of credit score, a borrower had access to credit in many different forms. Credit cards, payday loans, and mortgages for people with bad credit were all showing huge rates of return for lenders.
It all started with the creation of software called Desktop Underwriter. This is an algorithm used to determine the credit-worthiness of a potential borrower. This program was created and used by Freddie Mac and Fannie Mae, and was implemented nationwide. If you applied for a conventional loan, no matter what bank you were at or where in the country you were, your file and unique circumstances were plugged into this algorithm and it spit out a decision on whether or not to lend to you.
This program was, and remains to be, a huge success. The power that this device offers conventional lending is that it can accurately predict the risk level of a certain type of loan. By using historic data on individual segments of the borrowing community, the program can determine the default rates for certain types of loans, and changes in the approval guidelines can be made instantly on a national level. Because of this, Conventional loans were sold on the secondary market as secured assets with measurable risk factors.
The accuracy of prediction for default rates made these incredibly lucrative investment vehicles. Loans that were similar to each other were packaged into large bonds and sold as secured investments, and everyone wanted a piece of them.
This success was enough to force other areas of lending to try the same thing. Therefore, large hedge funds began to buy the mortgage-backed securities that were not currently being sold by Freddie and Fannie. Mortgage companies for people with bad credit were finding that it did not seem to matter what the specifics of the loan they had sold were, it was still going to be very easy to sell it on the secondary market.
This, as we know now, is the major contributing factor the economic recession we are feeling today. Unlike the conventional loans that were closely monitored through Desktop Underwriter, these sub-prime loans were not governed by any major force, and were not at all uniform with each other. Therefore, the warehouse lines of mortgages that were sold were a hodgepodge of many different scenarios. It was just assumed that, because of the success of Freddie and Fannie’s loans, these would be the same, mainly because the housing market and the economy as a whole were so strong.
When these loans started to go into default, the shockwaves rippled through the entire industry. The sub-prime lenders were the first to go out of business, but certainly not the only ones to feel the pain of this. Everyone was hurt by it, from investors, to retirement account planners to municipalities.
With all of these companies gone from the market, the only option left is FHA mortgage financing. These loans are available for bad credit borrowers, but unlike the Wild West of lending that, we saw in the past, it would take a lot of hard work for a bad credit borrower to get an approval.
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