Rich investors bet on ‘sane subprime’ loans
Once considered toxic, subprime mortgages get rebranded as ‘smart’
By AnnaMaria Andriotis
Banks want nothing to do with subprime mortgages, which nearly brought down the U.S. economy. But private firms are filling that void, rebranding loans to borrowers with poor credit as “sane subprime” and “smart nonprime,” and pitching them to wealthy investors in search of yield. This time, they say, it will be different.
The investment companies, which include private equity firms, hedge funds and alternative asset funds, say these borrowers aren’t as risky as they seem and that investors stand to make an attractive return, ranging from 7% to 12% annually, by lending to them. Critics say they are injecting risk into the housing market just as it’s recovering, which could result in another wave of foreclosures. The debate over some of these firms’ activities is also caught up in a bill before Congress that’s further dividing party lines.
Before the downturn, banks were originating risky mortgages and then selling them off to individual and institutional investors. Now a flip scenario is occurring: These investors are the ones originating the riskier loans. Most of the individual investors providing the funds are “accredited,” meaning that they have a net worth of more than $1 million (excluding their primary residence) or an annual income of over $200,000 for the past two years. They’re looking for a way to diversify their portfolio holdings while earning a bigger return to boot. MarketWatch has also reported on the growing trend of average Joes entering the subprime lending business.