A Chill Comes Over Credit

Bad news has been emerging from the subprime market every week, as the trade press reports that one lender after another in trouble.

As of mid-April, National Mortgage News, a trade publication, counted 32 subprime lenders that had become "defunct" since early 2006.

The good news is that many subprime lenders remain. Such lenders cater to borrowers with blemished credit histories or insufficient cash for a down payment. The group that was once the trade association of subprime lenders, the National Home Equity Mortgage Association, had 250 member firms in 2005. The association has since merged with the Mortgage Bankers Association, which is the mainstream trade group.

However, we don't know whether the firms remaining are still making loans, and if they are, at what terms. Mortgage brokers are in the best position to answer these questions because they intermediate a large proportion of all subprime loans.

Last month, the UpFront Mortgage Brokers Association, a group of which I am the chairman, surveyed its membership on these questions. (Members agree to a variety of specific disclosure practices that I have advocated. They account for a small slice of the overall brokerage industry.) Of the 55 brokers who responded, five specialized in subprime lending, nine did no subprime lending and the other 41 did subprime loans along with prime loans.

We asked the brokers to describe the changes that have occurred with their wholesale lenders over the past six months. We found that a few brokers with potential subprime clients had lost access to subprime lenders. However, most have been able to replace defunct lenders with other lenders who were still operating. These were typical responses:

"We lost Fremont, New Century and MLN [Mortgage Lenders Network USA]. We have added BNC, IndyMac and MortgageIT."

"At one time, I was using as many as eight different subprime lenders for my clients. With everything that has happened over the last six months, I am now down to three subprime lenders."

One broker said the Federal Housing Administration has helped fill the void, while another observed that the lenders folding up were being replaced by better lenders.

The brokers were unanimous in reporting a tightening of underwriting requirements:

· 100 percent loans are much more difficult to find, with the remaining subprime lenders now requiring 5 or 10 percent down.

· Stated-income loans, where income is not verified by the lender, are no longer available for subprime borrowers with income derived from salaries or wages.