The housing crisis that created so many investing opportunities today had several culprits that contributed to the evaporation of homeowner equity from sea to shining sea. From easy qualifying mortgage loans to complicated collateralized debt
obligations, or CDOs, multiple events reared their ugly heads. The story is well known but one of the main reasons things fell so hard and so fast was due to the changing nature of subprime lending.

Subprime loans have been around for decades. Well, at least for most of the time but they vanished from around 2010 to late last year. Subprime loans cater to those with damaged credit and serve a market that is in need of some serious credit repair. Subprime lenders help those to put themselves in a position to ultimately fix their credit and refinance out of a subprime loan into a conventional one.

Traditionally, subprime loans required 20 to 30 percent down, balloon payments, and required the borrower’s document their income and assets. However, when subprime lenders temporarily lost their minds from around 2003 to 2009, subprime lenders attempted to expand their market share by reducing the down payment requirement and eliminating the need to look at pay check stubs and income tax returns. These were the so-called “liar loans” that permeated the industry and put subprime lenders out of business completely.

In their original form, subprime loans actually do the real estate investment industry a favor by making a loan to someone who needs help, allowing the subprime borrowers to own real estate while fixing the damaged credit. After a period of timely payments and recovered credit scores, the subprime loan is replaced by a conventional mortgage.

The credit industry is now closely watching the emergence of a new batch of subprime lenders that are entering the market. So far, it appears that the subprime loans introduced require a minimum 20 percent down payment. And today, the Consumer Financial Protection Bureau, or CFPB, requires that all mortgage lenders determine the ability to repay the mortgage. That means no more “liar loans.” Income must be verified.

Will subprime loans be a welcome addition or will they cause another mortgage meltdown? There’s only one way to find out and that’s simply to wait and see. But if properly approved and underwritten, this re-emergence might be a good thing for the industry.