MARCH 2004

Subprime Mortgage Lending
Saw Record Growth in 2003

According to the publication Inside B&C Lending (Bethesda, MD), subprime mortgage lenders originated more loans in 2003 than in any year on record. As was the case in the conventional mortgage market, refinancings drove much of the record growth. Overall, originators of 1-4 family residential mortgages across the entire market (prime and subprime) enjoyed a 40% growth in originations to reach $3.7 trillion. But subprime mortgage originations as a category grew even faster, rising 55.9% to reach $332 billion.

Industry experts offered a variety of reasons for the stronger performance of subprime relative to prime loans. Subprime borrowers are less sensitive to interest rate changes, which probably explains why subprime originations continued to rise in the fourth quarter of 2003 (by 7%), even as overall market originations fell by 40%. But also, subprime lenders have begun to emphasize purchase money loans, and have begun to target somewhat less risky borrowers. On the last point, Inside B&C Lending cites a new report by rating agency Standard and Poor’s that looks at credit quality of loans behind asset backed securities rate by the agency. Standard and Poor’s reported that the average FICO score on fixed-rate subprime loans backing such securities rose by 11 points between the end of 2002 and the end of 2003, to reach 636. Average FICO scores on adjustable rate loans securitized during the fourth quarter of 2003 rose to 613 from 606 at the end of the first quarter.