Defaults Drive Subprime Lending Restraint
Signs of self-imposed restraint on lending guidelines showed up this week in a somewhat surprising corner of the industry: the subprime market.
Reuters reported yesterday that Fremont Investment and Loan, the nation's fifth-biggest originator of subprime loans last year, was able to lower its early default rate from nearly 6 percent in mid-2006 to 3 percent through measures that included cutting ties with about 8,000 brokers whose loans were identified as contributing to the lender’s high default rate
Fremont also cut down on the number of so-called stated income loans, which allow borrowers to obtain a loan without proof of income, and reduced the number of 80-20 loans, in which borrowers simultaneously take out a first and second loan at the time of purchase. Both of these loan types are common, especially in markets where rapid home price appreciation in the past five years has compensated for the default risk inherent with such loans.
The push to lower defaults is driven by the asset-backed bond market, which packages and sells loans like those originated by Fremont. But more of those loans were returned to Fremont in 2006, resulting in a $16.4 million loss over the first nine months of the year, Reuters reported.
Fremont’s actions seem to contradict the belief that loan originators — especially those of the subprime variety — are concerned with only one thing: selling more loans. Instead, Fremont's bottom line appears to be the catalyst behind its efforts to reduce defaults, even if that means tightening lending standards. Maybe the free market does work after all.