Subprime lending is gaining steam again, although lenders are still largely steering clear of subprime mortgages, the disastrous home loans that triggered the nation's housing collapse.
Subprime credit cards and auto loans are both on the rise, and some bank risk managers predict further increases in the $600 billion U.S. auto loan market, where lenders are loosening the purse strings and investors are interested in packages of auto loans to those with less-than-perfect credit.
A new survey of risk managers at banks and other financial institutions released Tuesday shows that while only 25 percent of risk managers see subprime lending increasing in the next six months, half of those who see an increase expect it to come in auto loans.
It's a cautious but noteworthy response, said Andrew Jennings, chief analytics officer at Minneapolis-based Fair Isaac Corp., whose FICO credit scores are used by lenders. It doesn't suggest a flood of new subprime lending on the horizon, he said, but indicates loosening in the market.
"In the depths of the recession there was an extreme movement to higher FICO scores and we've noticed that, in the last 12 months or so, it sort of relaxed," Jennings said.
The credit analytics company, also called FICO, and Northfield, Minn.-based Professional Risk Managers' International Association survey risk managers around the nation every quarter about their expectations for the next six months. This was the first time the survey asked about subprime lending. "This is certainly a trend that's worth keeping an eye on," Jennings said.
Subprime loans are typically defined as loans to borrowers with credit scores below 680, but definitions vary.
Subprime auto loans up
According to credit bureau Experian, 44 percent of all U.S. auto loans made in the first quarter were to borrowers with scores below 680, up from 42 percent a year earlier. That's still short of the 46 percent level prior to the financial crisis in 2008. Commercial banks continue to dominate.
Subprime mortgage lending all but disappeared after the nation's housing collapse. Mortgage giant Wells Fargo & Co., for instance, said it shut down its last non-prime mortgage operation more than two years ago.
Auto loans to less-creditworthy borrowers, however, chugged right through the collapse. Packages of subprime auto loans bundled and sold to investors on the secondary market performed well. Such loans are smaller than mortgages, and cars often are viewed as critical to households.
People are shedding debt and working hard to make their payments on cars "over and above payments on mortgages," Jennings said.
Consumer advocates say the world of subprime auto financing is diverse and rife with abuse in some corners. Risk-based pricing is not the same as solid loan underwriting, said John Van Alst, a lawyer for National Consumer Law Center in Boston.
Guy Cecala, publisher of Inside Mortgage Finance, said the recent growth in subprime auto lending has surprised him.
"It's all due to securitization," he said. "There's a ready securities market for those loans. People feel better about subprime auto loans than they do about subprime mortgages."
In fact, he said, because of the higher yields on subprime auto loans, they feel better about them they do about top-of-the-line mortgages.
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