Back in another era, subprime was not the bad word it is now but a legitimate part of the mortgage industry.
There were people who wanted homes but didn’t qualify for traditional mortgages, which called for good credit record, assets and income. The requirements were like a three-legged stool; if one leg was slightly wobbly -- say someone self-employed without full proof of income or someone who couldn’t pay 20 percent down -- the other two legs had to be stable for the borrower to get a loan.
Lenders would make rational risks and come out with reasonable loan-to-value mortgages.
What contributed to the subprime collapse in August was "creative financing." Some lenders gave two loans to cover everything, including closing costs, as a way of getting the business of borrowers who obviously couldn’t pay. Others lured customers with low introductory interest rates, only to smack them with high ones a year or so later.
Now, the old management crew at Delta Financial Corp., a subprime lender that filed for bankruptcy in December, is returning with a new mortgage company, Reliance First Capital. On the surface, that may sound foolhardy in today’s still wobbly lending industry, but there may be a niche for the newcomer, as Newsday reports.
--Ellen Yan