NEW YORK — The business of bundling riskier mortgages into bonds without government backing is gearing up for a comeback. Just don’t call them subprime.
Seer Capital Management, Angel Oak Capital, and Macquarie Group are among those buying up loans to borrowers who can’t qualify for conventional mortgages because of low credit scores, foreclosures, or hard-to-document income. They plan to pool the mortgages into securities of varying risk and sell some to investors. JPMorgan Chase & Co. predicts as much as $5 billion worth of such deals this year.
Investment firms are looking to revive the market without repeating mistakes that fueled the US housing collapse and global economic crisis last decade. They’ll retain the riskiest stakes in the deals. Before the crisis, Wall Street banks shifted most of the dangers to others. Now, Seer Capital and Angel Oak use the term ‘‘nonprime’’ for lending that used to be known as subprime. While ‘‘subprime is a dirty word’’ these days, ‘‘what everyone is seeing is the credit box has shrunk so much that there’s a lot of good potential borrowers out there not being served,’’ said John Hsu, at Angel Oak.
Reopening this corner of the bond market may lower consumer costs and expand lending, aiding the housing recovery. The most dangerous slices created from the securitization of loans are also the highest-yielding, offering private-equity firms, real estate investment trusts, and others a way to increase returns while interest rates are low.
Angel Oak, for example, will buy loans with credit scores as low as 500, well below the 680 level some use as a cut-off for subprime on a scale of 300 to 850. It makes sure borrowers can afford the payments and requires at least 20 percent down payments, Hsu said. Interest rates on Angel Oak’s loans average 8 percent, versus 3.6 percent on typical mortgages.