Before the financial crisis, it was much easier for individuals with poor credit histories to get mortgages. Known as subprime mortgages, these loans typically came with higher interest rates on account of the higher level of risk posed to the lender.
That has since changed. The crisis that culminated in 2008 was caused by an increase in subprime mortgage foreclosures and subsequent losses in mortgage-backed securities. Credit has gotten tighter since then, and banks have shown little willingness to take the extra risk necessary to offer loans to individuals with poor credit.
Still, some alternative lenders are looking for a way to serve this market. According to an article in the New York Times, a new nonprofit organization known as the Neighborhood Assistance Corporation of American seeks to enter the subprime mortgage market. However, founder Bruce Marks has an unorthodox strategy to serve those who have difficulty securing any other form of loan. He told the news source that he would not require down payments, that he would not look at credit scores and that all loans would carry interest rates of 4 percent or less.
“I think that everybody should have an opportunity to own a home,” he said. “We’ve got to rekindle hope in people, especially minorities who threw everything into the dream of homeownership and lost it.”
It sounds impossible. But Marks claims that he has other, more thorough ways of screening applicants to ensure that they are not too risky. This includes requiring them to join his nonprofit and pay an annual fee of $20 for the membership.
Marks is not alone in his effort to bring financial services to those who have little access to them. But his example highlights the importance of seeking out alternative data sources to perform a thorough credit risk assessment when processing loan applications.
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