SEPTEMBER 2004

Low-Doc Subprime Loans

The end of the mortgage refinance boom has sent many lenders scrambling to maintain loan origination volumes. That, in turn, has pushed more lending resources into the subprime market where some lenders are courting higher risk borrowers with origination and underwriting practices once reserved solely for prime borrowers. Prominent in this trend is the spread of low-doc mortgage loans. Some mortgage lenders are making mortgage loans to borrowers based primarily on the borrower's FICO score, without documentation of income.

The trend has grown sufficiently to worry large mortgage insurers. In August of this year, MGIC Investment Corp (Milwaukee, WI) stopped insuring low-doc loans for borrowers with FICO scores of less than 660. Patrick Sinks, EVP of Operations for MGIC, told the American Banker that "the reward does not justify the risk. Losses are significantly higher" on loans to borrowers who have FICO scores below 660. The company would have to compensate by charging substantially higher premiums than the market would pay. MGIC's shift away from insuring these low-doc loans is likely to affect a sizeable segment of the subprime mortgage business. Some of MGIC's corporate customers indicated that low-doc loans made up 20% to 25% of their originations.