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How lenders describe 'subprime' borrowers

May 28, 2004

'Non-prime,' 'credit-impaired' or just plain 'lousy risk'

By Samantha Peterson
Inman News

In the words of one researcher, subprime borrowers are "untapped potential."

That description might reflect the fact that these borrowers have become an attractive opportunity during the robust housing market. Many subprime borrowers who would have had extreme difficulty obtaining a mortgage just a decade ago can do so far more easily today.

More lenders are taking notice of this market. They don't want to discourage potential customers who don't qualify for prime, or "A," loans, so "subprime" has become the generally accepted term. But other terms are in use, and many of them aren't nearly as pleasant-sounding to potential borrowers.

Regardless of what they're called, subprime borrowers can bring great benefits to lenders. These borrowers generally are less sensitive to interest-rate fluctuations than prime borrowers are because they're "more desperate for money," said George Yacik, VP of SMR Research Group, which recently published a study on the subprime mortgage market.

Subprime mortgage loan originations grew by more than 50 percent last year, industry net income nearly doubled for the second straight year, and demand is expected to increase this year as well, even as demand for prime-rate loans sinks with rising interest rates, according to SMR's study.

"More people have credit trouble, but also the lenders have made it possible for those people to actually get loans, where 10 years ago, they were maybe out of luck," Yacik said.

Personal finance expert Suze Orman refers to "subprime" as simply a nicer way of saying, "lousy rates for a lousy risk." She encourages borrowers to clean up their act, so they can qualify for a prime loan, instead of settle for a subprime loan.

A Web site about English words and phrases concluded that "subprime" borrowers, in plain language, might be called simply "bad risks."

That's hardly a phrase lenders would be eager to share with such borrowers. So, how about "sub-standard"? That's broad enough that such borrowers might wonder whether they're being called "sub-standard" in more ways than just their ability to qualify for a mortgage.

Subprime lender Ameriquest refers to these borrowers as "nonprime." How does that compare with "subprime"? Perhaps it's a tad nicer since the borrower isn't being referred to as "sub-" anything.

"Credit-impaired" doesn't have a bad ring either, and the same might be said for "less-than-perfect credit." Or perhaps "blemished credit"? That sounds like it could be repaired with a little makeup.

Poor credit is the usual reason why a borrower would be qualified only for a subprime loan, but an inability to document income also could be the reason. Such a borrower might seek a loan that doesn't require much in the way of documentation. The term "low-doc" wouldn't describe all subprime loans, but it doesn't sound too bad for that type of loan.

The term "hard-to-place" loan at least refers to the loan, not the borrower. Still, the borrower might wonder where the loan is supposed to be placed.

And "difficult-to-qualify" might discourage such borrowers from seeking out a lender.

Letter grades—from A to D—bring back memories of school grades and point out to borrowers how good—or how poor—their loan qualifications are. And the criteria for letter grades can vary from one lender to the next, Yacik said, making those terms unhelpful in defining groups of borrowers.

Norm Bour, owner of Priority Plus Lending in Southern California, said "subprime" is a catchall phrase for those different terms.

"It sounds innocent enough that people who are in this category don't feel like deadbeats or flakes," Bour said. "Some borrowers realize they are poor credit risks, but many are in a state of denial, which may have contributed to their being in that position."

The preference for the term "subprime" is understandable. After all, lenders want to entice these borrowers, not turn them away at the outset by what they call them.

Copyright: Inman News Features



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