B, C and D paper loans are all types of alternative, or non-conforming, loans
usually for borrowers with poor credit. The term "paper" simply refers to the
fact that when a lender makes a loan, it takes back a promissory note and security
interest such as a mortgage - which are pieces of paper. Put simple, B, C, and
D loans (as well as A loans) are sub-prime loans.
Lenders like to classify loans according to risk. First they
divide them into conforming and non-conforming loans. Conforming loans are the
safest. Non-conforming loans are more risky and are alphabetically classified
according to risk. Non-conforming A loans are less risky than B loans which
are less risky that C loans which are less risky than D loans. There are no
loans with lower classifications.
Non-conforming A loans, also called
Alt-A loans, are usually
made to borrowers who just barely miss the requirements for a conforming loan.
An example would be a borrower who pays all her bills, but has paid some of
them late within the last year. Since almost no one has perfect credit, this
is the type of loan that most people with good credit get. There is a big market
for Alt-A loans, and their interest rates are fairly competitive with conforming
loans.
There are far fewer lenders who want to make Alt-B, C, and D loans (though
the market is growing), so there is less competition for these borrowers causing
interest rates to be higher. That these borrowers are seen
by lenders as more risky and more desperate also pushes up the interest rates
with these non-conforming loans.
Sometimes alternative loans can be predatory,
but they can also have their place for homebuyers with less than perfect credit.
For instance, if a homebuyer has poor credit because he has some recently paid
debts that will come off his credit report in the next few years, he can get
an Alt-B or C loan and make timely payments on it. This will improve his credit
and allow him to refinance for a conforming loan faster than if he just pays
off the old debts and waits until he is able to qualify for a conforming loan.
Borrowers in this situation should be careful that there are no significant
pre-payment penalties, which are common with non-conforming loans, preventing
them from refinancing.
Answer Submitted on Tue, Feb 6 2007
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