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Nonprime Market Sees New Entrant

In an effort to give greater attention to what the company says is an “underserved” market, Carrington Mortgage Services announced Monday its intent to put a tighter focus on borrowers with credit scores in the sub-640 range.

According to a company release, Carrington has lowered its minimum credit requirements to a FICO score of 550 and expanded its guidelines on certain loan programs under the Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA), extending eligibility to more property types and reducing overlays.

According to the company, about one-third of consumers have a FICO score below 650, which sits just above the typical “subprime” threshold of 640. While obtaining financing is particularly difficult for this group—especially at a time when the average FHA purchase loan has a FICO score of 686, according to Ellie Mae—Carrington says it is “uniquely equipped to handle” the challenge.

“Effectively meeting the needs of clients in the underserved market requires the ability to both originate qualify loans and appropriately service them after the fact,” said Ray Brousseau, EVP of Carrington Mortgage Services’ Mortgage Lending Division. “Both Carrington’s lending platform and specialty servicing business were created to serve this particular market segment. That uniquely positions us as the lender of choice for this population of borrowers, and the mortgage brokers and real estate agents who work for them.”

While the lender plans to continue providing products and support to borrowers at all ranges of the credit spectrum through its retail lending division, Carrington also announced it will eliminate conventional and jumbo loans from its wholesale product line effective April 1. In addition, acceptance of wholesale submissions with FICO scores above 680 will be limited.

According to the release, “The company feels strongly that this move is necessary for appropriately allocating its resources to provide optimum support to borrowers in the underserved market.”

Carrington’s announcement comes at a time when lenders are exploring the idea of opening up lending to a greater spectrum of credit scores. In February, Reuters reported Wells Fargo may start working with scores as low as 600; that report was followed by a caution from Moody’s Investor Service that special servicers may soon seek to augment their margins by moving into subprime territory.

In a phone call, however, Brousseau said the stereotypical “subprime” characterization depicted in the media—risky, irresponsible loans with no document requirements or income verification—isn’t a fair label for Carrington’s new offerings, which will require full documentation and involve a heavy degree of quality control.

“The reality is that what we’re doing here is an agency-backed loan. These are all FHA originations; they meet agency guidelines; they’re QM,” he said.

The latest news hasn’t escaped the attention of commentators who maintain risky lending activity is still continuing at a dangerous pace. In a press call discussing the group’s most recent National Mortgage Risk Index, American Enterprise Institute resident fellow Edward Pinto discussed the announcement, warning that loans in the range Carrington is getting into are considered “extremely risky mortgage[s] based on past history.”

“These loans, based on our risk matrix, have a greater than one in three chance of defaulting under stress,” Pinto said.

Again, Brousseau argues the characterization is inaccurate.

“It’s not the kind of origination that can be originated by anyone and serviced by anyone,” he said. “We’re a very diversified firm, [and] we have a specialty servicer that’s part of the organization. It’s not just about originating the loan, but it’s originating the loan and making sure that client is properly serviced. I think that’s an important characteristic.”


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