Mortgage lenders more willing to loan to ‘non-prime’ borrowers

Home loans provided to subprime and near-prime borrowers were up 17.6 percent during Q3 2021.

Encouraged by the performance of loans taken out during the pandemic, lenders are increasingly willing to provide mortgages and other loans to borrowers with subprime and near prime credit scores, according to an analysis by credit bureau TransUnion.

Non-prime borrowers take out only a small fraction of home loans, but mortgage originations to that segment grew by 17.6 percent from a year ago during the third quarter of 2021, even as overall mortgage originations fell 12.6 percent, TransUnion found.

The percentage of mortgages that are delinquent by 90 days or more fell from 1.05 percent during the fourth quarter of 2019 to 0.59 percent during the last three months of 2021, the analysis found.

TransUnion’s latest quarterly Credit Industry Insights Report shows that a record 20.1 million credit card accounts were opened in the third quarter, with 9 million new accounts granted to consumers with non-prime credit scores.

Growth in non-prime lending

Non-prime originations during the third quarter of 2021. Source: TransUnion quarterly Credit Industry Insights Report

The 75 percent annual increase in non-prime credit card accounts led all categories, followed by personal loans (up 46.9 percent), mortgages (17.6 percent) and auto loans (5.6 percent).

TransUnion defines non-prime consumers as both “subprime” borrowers scoring 300 to 600 on TransUnion’s VantageScore 4.0 scale, and “near prime” borrowers scoring 600 to 660.

“Despite recent upticks in delinquencies in the most recent quarter, serious delinquency rates also remained near or below pre-pandemic levels in the wake of expired forbearance programs, which has continued to restore lender confidence,” TransUnion said in its analysis.

All types of loans originated in 2020 are performing as well or better than accounts opened in 2018 and 2019, the company said.

“There was a great deal of uncertainty in the initial months of the pandemic, and many lenders opted to take a wait-and-see approach,” Charlie Wise, TransUnion senior vice president of research and consulting, said in a statement. A jump in the number of consumers enrolled in loan accommodation programs added to the uncertainty, Wise said.

“Toward the end of 2021, the majority of accommodation programs have expired and lenders have seen that consumers continue to perform well on their credit obligations,” Wise said. “Lenders are eager to pursue growth, including expanding back into the non-prime consumer segment.”

With interest rates on the rise, many mortgage lenders are once again finding that most of their business comes from homebuyers looking to purchase a home, rather than homeowners looking to refinance at a lower interest rate.

Refinancing vs. purchase loan originations

Source: TransUnion quarterly Credit Industry Insights Report

After falling to just 42 percent during the first three months of the year, purchase loan originations bounced back to claim 55 percent market share during the third quarter of 2021, according to TransUnion estimates.

With the pool of consumers who would benefit from a refinance shrinking, it’s becoming more important for lenders to find borrowers who are both in the market for a home and who qualify for one, Joe Mellman, senior vice president and mortgage business leader at TransUnion, said in a statement.

“New consumer populations, such as the low-to-moderate income consumer segment, have been relatively untapped,” Mellman said. “Consumer demand for a home is still high, and with more consumers eyeing home purchases, it can be a lucrative avenue for mortgage lenders to pursue in the year ahead.”

According to the latest ICE Mortgage Technology Origination Insight Report, the average FICO score of borrowers taking out a loan in December was 737, down from 752 at the start of the year. The average FICO score of borrowers taking out FHA purchase loans in December was 676, down from 683 in January.

Although ICE Mortgage Technology estimates that only 6.83 percent of borrowers taking out purchase loans in December had FICO scores below 650, that’s up from 6.26 percent the same time a year ago.

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