Nearly ten years after the subprime mortgage crisis that brought the global financial system to its knees, it appears that some U.S. lenders are regaining their appetite for riskier borrowers, according to a story in Bloomberg. Of greater concern is that some ratings agencies are now giving top grades to bonds backed by these loans.
Moody's Calls Loans Risky
More than $210 million of bonds backed by loans made by Caliber Home Loans, a division of Lone Star Funds, and by mortgages made by Sterling Bank & Trust and LendSure Mortgage Corp. will be receiving AAA grades from rating agencies Fitch Ratings and DBRS Inc., according to Bloomberg.
A number of the loans underlying the bonds were made to borrowers whose incomes were verified merely by bank statements rather than tax returns, a practice that makes it much easier for borrowers to convince the lender of their ability to repay the loan. For this reason, Moody’s Investors Service recently claimed that mortgages made under such circumstances were risky.
During the subprime meltdown, nearly a quarter of subprime mortgages went into default by 2008 that had been issued without requiring the borrower to provide pay stubs or tax returns to prove their income. That compares to about one in five for subprime loans with full income documentation, according to Bloomberg. (To read more, see: The Fuel That Fed The Subprime Meltdown.)
In an attempt to limit such risky lending practices, the Consumer Financial Protection Bureau (CFPB) instituted a qualified mortgage rule in January 2014. The rule requires lenders to take detailed and adequate steps to ensure that borrowers are capable of repaying their mortgages. Failure to take such steps in issuing mortgages could make lenders legally liable.
Despite the rule, the majority of the loans underlying the aforementioned bonds are mortgages that are not qualified, Bloomberg says in its story published on December 7.
In a comment from Quincy Tang, Managing Director and Head of US RMBS at DBRS, Investopedia learned that the transaction is the third Lone Star non-qualified mortgage securitization of its kind that DBRS has rated, but the first one receiving a AAA rating. While the rating is classified as provisional, with the closing date for the transaction set for December 15, Tang noted, “DBRS believes that the rated bonds are well supported.”
Fitch declined to comment for this story. In a report issued by Fitch, the agency reveals that its criteria for rating the bonds was similar to that used for Alt-A mortgages. Borrowers extended Alt-A loans typically have clean credit histories but have higher loan-to-value and debt-to-income ratios or inadequate income documentation. (To read more, see: Alt-A Mortgages: How They Work.)
Such Alt-A loans were commonly issued prior to the subprime mortgage crisis, and with rating agencies willing to slap top ratings on bonds backed by them, it would appear that memories of crisis are giving way to images of dollar signs.