The subprime market is undergoing a major change due to the recent narrowing of lender guidelines regarding applicants. Why in particular is the subprime market being targeted? Perhaps this is because the subprime market tends to experience more problems with meeting their loan obligations than other markets.
Individuals who have to acquire a subprime loan typically have a spotty credit record, no credit record at all, or a bad credit record. No matter how you look at it, any lender who has the inclination to lend money to someone like that is taking a risk. Unfortunately, that risk is often realized in the form of defaults, bankruptcies, and foreclosures.
The narrowing of guidelines effectively narrows the pool of applicants. The guidelines are simply a set of rules that are used to determine who qualifies for a loan and who doesn’t. Hence, if the guidelines become more restrictive, the risk is lessened for the lenders along with the size of the qualified applicant pool. In essence, the individuals who are the biggest risk will no longer be able to acquire a loan.
In effect, the true suppliers of the money that is provided for subprime loans are looking to decrease their risk regarding their mortgage portfolio while increasing their profit. If the guidelines aren’t changed swiftly enough, lenders who are caught in the crunch may have to close their doors. Fewer lenders means less competition and quite possibly less favorable terms for the borrowers.
Guidelines typically involve looking at the borrower’s credit score, the amount of the down payment, the individual’s track record for credit accounts, and work history. Up to now, these have all been flexible and rather tame. Times are changing though, and the mortgage industry is about to crack down on individuals who don’t know how to manage their money.
An A paper loan is one that is given to a borrower who has the highest credit rating possible. It offers the most favorable terms including the lowest interest rates, the fewest points, and the least amount of other conditions attached to the loan. With the changes that are set to become standard at some lending agencies, A loans will be easier to acquire for some, and subprime loans are going to become more difficult to acquire.