A tiny section of HLTV Ohio home mortgage lending is aimed toward Ohio subprime (high-risk) borrowers. For most HLTV borrowers, however, default risk is low. Lenders thus gain from increased assurance that loans will soon be repaid, while borrowers gain lower interest rates on their restructured bank card debt, plus tax-deductibility on some of the Ohio home equity loan interest.
The usage of the term subprime to characterize HLTV lending has produced some confusion regarding its nature and risks and has led some observers to regard the practice as requiring specialized skills. In fact, the profitability and low average danger of HLTV lending have
been among the industry’s best-kept secrets. Some banks entering HLTV lending are surprised by the profitable low-risk lending opportunities it may offer. Banks like City Holding Company (Charleston, West Virginia) and Community West Bancshares (Goleta, California) are among the ones that until recently have been reluctant to enter the HLTV arena. After they began offering HLTV loans in 1997, bank executives soon realized that”the business is never as complex because they initially believed and resembles the title pawn Atlanta I lending they’d done for years”(Talley 1998, 7).
The confusion has largely come from semantic difficulties. Before HLTV lending, the vast majority of loans beyond your specifications of Fannie Mae and Freddie Mac went along to borrowers with significantly less than excellent credit.
That’s no more the case, but the text between failing woefully to conform to Fannie Mae and Freddie Mac standards and Ohio subprime branding lives on. The subprime brand (or B and C ratings) is usually still placed on all loans which have”been rejected by Freddie Mac or Fannie Mae because [the loans] don’t meet their underwriting criteria”(Bush 1997, 34). Freddie Mac defines the subprime Ohio home mortgage market as a distinct segment that finances mortgages that not meet traditional underwriting standards. Ohio Subprime mortgages are made to borrowers who have a variety of past credit problems of varying severity or to people with unconventional borrowing needs, including the ones that exceed 100 percent of the underlying property’s value. (Roche 1998)
The implications of Freddie Mac’s characterization are very important: references to Ohio subprime mortgages may arise as a result of borrower characteristics or Ohio mortgage product characteristics. This confusion was evident in the November 1996 conflict between Greentree Financial, a leader in manufactured housing loans, and Faulkner & Gray, a publisher of industry statistics on theOhio subprime lending industry. Before November 1996, Faulkner & Gray’s Inside B&C Lending was reporting Greentree Financial as the quantity 2 servicer in B and C (or subprime) loans.
”However, this ranking was on the basis of the inclusion of [Greentree’s] manufactured housing
loans and Greentree did not want these loans to be reported as subprime. Consequently, its ranking fell to No. 28”(Froass 1997, 99).
The confusion has progressed to the stage where in actuality the Ohio Mortgage Bankers Association of America now favors the definition of nonconforming credit for several such lending in this area. With this distinction the MBA has cautioned that”a lender referred to as a property equity lender cannot [therefore] be assumed to lend solely to Ohio subprime borrowers.”
Furthermore, HLTV Ohio mortgages are often A- to Aminus-grade credits and are categorized as nonconforming credits only because of their size in accordance with the worth of Ohio mortgage collateral (which is area of the lender’s protection against default). The actual protection enjoyed by lenders extends to one other assets and income of borrowers and to the nonpecuniary losses that borrowers would suffer from foreclosure.