Subprime Lending, a Definition

Subprime loans seem to be the new buzz-word in real estate. We are hearing more and more about this new trend, and it is causing fear in financial institutions across the nation. Borrowers with bad credit are able to obtain a mortgage, and when the rates change, they are unable to make their payments, they go into default, and their property goes into forclosure.

Wikipedia definition of Subprime lending: , also called B-paper, near-prime, or second chance lending, is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. The term also refers to paper taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and certain types of self-employed individuals. Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and murky financial situations often associated with subprime applicants. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk.

Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. The term “subprime” refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself.

Subprime lending is highly controversial. Opponents have alleged that the subprime lending companies engage in predatory lending practices such as deliberately lending to borrowers who could never meet the terms of their loans, thus leading to default, seizure of collateral, and foreclosure. Proponents of the subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.

The controversy surrounding subprime lending has expanded as the result of an ongoing lending and credit crisis both in the subprime industry and in the greater financial markets which began in the United States. This phenomenon has been described as a financial contagion which has led to a restriction on the availability of credit in world financial markets. Hundreds of thousands of borrowers have been forced to default and several major subprime lenders have filed for bankruptcy.

From the Forbes.com website: “The survey of 1,700 mortgage brokers sponsored by trade publication Inside Mortgage Finance comes as numerous lenders that catered to subprime borrowers with weak credit close down and lenders back away from riskier lending practices common in recent years. That has led to many borrowers being stuck without a loan as they prepare to settle.” Read the complete article on sub-prime loans: http://www.forbes.com/feeds/ap/2007/09/05/ap4086046.html

From the National Association of Realtors (9/7/08): Bush Announces FHA-Secure Plan to Assist Subprime Borrowers
On August 31, 2007, President Bush announced a new initiative called FHASecure, which will give the Federal Housing Administration (FHA) flexibility to help more families keep their homes in light of the decline of the subprime market and impending interest rate adjustments affecting numerous borrowers in both the subprime and Alt-A markets. The FHASecure program will help people who have not made all of their payments on time because of rising mortgage payments but who otherwise have good credit. NAR applauded President Bush’s statement of support for giving homeowners greater flexibility to refinance their loans through the FHA. At a white house conference call on the initiative, the administration specifically signaled out NAR for our timely support of the initiative. NAR has been advocating regulatory changes to the FHA program. On April 9, 2007, NAR sent a letter to Alphonso Jackson, Secretary of Housing and Urban Development, asking that FHA waive the requirement that a homeowner’s mortgage be current to refinance into an FHA loan product. NAR also supports legislation that would give FHA greater flexibility by increasing loan limits, eliminating the statutory 3 percent minimum cash down payment, allowing FHA flexibility to provide risk-based pricing, and revising the condominium program.

Subprime loans are increasing in volume and value, particularly in densely-populated states like California and New York. Nationwide, subprimes account for about 10% of all mortages. Share of mortgage loans in 2003 that are subprime:
Rhode Island

14%

California

13.3%

Nevada

12.9%

Florida

12.8%

Tennessee

12.6%

Texas

12.3%

Utah

12.2%

New York

11.5%

Oklahoma

11.2%

Maine

10.6%

Delaware

10.5%

Connecticut

10.2%

Mississippi

10.2%

Alabama

9.9%

Arizona

9.9%

Nation

9.9%

New Hampshire

9.6%

Missouri

9.5%

Ohio

9.5%

South Carolina

9.3%

Indiana

9.1%

North Carolina

9.1%

Louisiana

9.0%

Oregon

9.0%

Colorado

8.9%

Georgia

8.9%

Kentucky

8.9%

Hawaii

8.7%

Illinois

8.4%

Kansas

8.3%

Michigan

8.3%

Pennsylvania

8.2%

Maryland

8.1%

New Mexico

8.1%

Massachusetts

8.0%

Minnesota

8.0%

Nebraska

8.0%

New Jersey

7.9%

Idaho

7.7%

Washington

7.7%

Wyoming

7.5%

Iowa

7.2%

Virginia

7.2%

Montana

7.1%

West Virginia

6.6%

Arkansas

6.4%

South Dakota

5.3%

North Dakota

5.2%

Wisconsin

4.6%

Alaska

4.5%

District of Columbia

4.5%

Vermont

4.5%

Puerto Rico

2.8%

Source: Mortgage Bankers Association

Another good article regarding subprime lending is on USAToday.com: http://www.usatoday.com/money/perfi/housing/2004-12-07-subprime-day-2-usat_x.htm

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  1. #1 by Thermometer on September 25, 2007 - 8:40 am

    Thanks for links! Your post is very actual now.

  2. #2 by Edwin on November 22, 2008 - 10:50 am

    Thank you very much for your post. Absolutely excellent information and very useful for me. Great done and keep posted. Looking forward to reading more from you.

  3. #3 by KELI on November 22, 2008 - 12:52 pm

    Glad it was helpful. Thank you!

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