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They’re baaaack: Subprime loans

By Judy Martel ·
Tuesday, December 24, 2013
Posted: 7 am ET

They say history repeats itself and that seems to be the case with subprime mortgage-backed securities -- those same bonds that contributed to the financial collapse. Private equity firms, hedge funds and alternative funds are promoting packaged subprime loans to wealthy investors with potential return rates of 7 percent to 12 percent annually, according to MarketWatch.

Does lipstick make a pig look pretty?

Part of the difference this time has to do with how the loans to borrowers with poor credit are branded for investors: The private investors are naming them "smart nonprime" or "sane subprime," hoping to erase memories of vast amounts of loss associated with the name "subprime" during the recession.

Banks won't touch these loans, but private investors looking for a bigger return from the recovering housing market and a way to diversify their portfolios are making the bet. Most of the investors are defined as accredited, with a net worth of more than $1 million or an annual income above $200,000 for the past two years.

Which are higher, the rates or the borrowers who accept them?

So what does this mean for borrowers? Much higher interest rates, for one, which jack up the purchase price of the home considerably during the life of the loan. Interest rates typically start at 8 percent and can be as high as 12 percent. Compare that with the national average of 4.58 percent for a 30-year fixed-rate loan, according to the latest Bankrate survey of large lenders. In addition, some loans will carry adjustable rates that could rise at some specified point in the future. That's what got so many borrowers in trouble the last time around.

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