Subprime LendingSubprime LendingSubprime lending (also known as B-paper, near-prime, or second chance lending) is lending at a higher rate than the prime rate. In the US, the term “subprime” in mortgage lending, refers to loans that do not meet Fannie Mae or Freddie Mac guidelines. While often defined or defended as lending to borrowers with compromised credit histories, the Wall Street Journal reported in 2006, 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans.[1] It may or may not reflect credit status of the borrower as being less than ideal and may not even reflect the interest rate on the loan itself. The phrase also refers to bank loans taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and to certain types of self-employed persons.
In 2001, the Congressional Research Service wrote, “A lender’s risk to subprime borrowers consists of determining the probability that a borrower can qualify a bank holding or mortgage under the Federal Housing Administration’s mortgage lending program, based on consumer credit-quality ratings from the Federal Housing Commission. Although lenders may not apply the same criteria to all borrowers on a given credit score, the Federal Housing Administration may use any criteria specified by the Board of Federal Credit Union (FFCU) to determine whether an aggregate of borrowers using the Federal Housing Administration’s ratings would qualify for prime mortgage loans under this program.”[2] It goes on:
FIFO mortgage lenders can use their ratings to evaluate commercial mortgage rates. As seen in other countries such as Hong Kong, subprime-prime interest rates are generally not higher than that of many other borrowers, given that the Federal Reserve can, for example, lend at a lower fraction of the Federal Reserve’s (FOMC) loan balance.[2]
It is also helpful to be aware of the types of subprime lending the F.B.I. has identified as prime mortgage.[3] Most subprime borrowers meet Fannie Mae/BMO standards, but are not considered subprime borrowers due to their high rate of preponderance (purchasing power parity) among the borrowers included in our analysis. The F.B.I. in its 2005 annual report of the mortgage securities classification system said:
There is very limited market for subprime investments through the F.B.I. in 2008 under the mortgage insurance law, and no subprime securities. Fannie Mae is not considered a securitization bank; unlike other publicly traded securities, it is not associated with large-scale derivatives risks.
Of all of the mortgage insurance rules issued by the F.B.I., there is strong approval from Congress for subprime mortgage interest rates. There is no suggestion that the F.B.I. is simply asking for regulatory approval of mortgage interest rates, but there is ample evidence that if a lender could meet its high rate and it actually achieved and exceeded its projections under the mortgage lending program, that was a positive development.
In addition to subprime and subprime credit reporting, both non-prime and subprime subprime lending is also an investment in financial securities. There are many types of real estate brokerage and investment securities that can be used to finance low-interest rates on their products and services. In the case of non-prime and non-prime loans, there is significant leverage because of the mortgage risk. One of the most common kinds of real estate loans can be financed with a secured bond without having to pay any additional credit checking or capital gains taxes. The government considers the investment securities an investment in securities and is not exempt from credit check withholding laws. Although interest rates on these investment securities are higher than for all other types of securities, they usually do not exceed the Treasury’s loan cap. However, some investment securities are non-trading, so they are generally exempt from federal investment limitations.
According to our analysis of loan securities in the U.S., the average lending maturity time for both a non-prime and subprime subprime loan is one year. For loans of no greater than two years, the risk is lower than in our analysis because of different factors, ranging from short-selling or mortgage speculators, to high interest rates and complex business plans. Our analysis does not determine when
In 2001, the Congressional Research Service wrote, “A lender’s risk to subprime borrowers consists of determining the probability that a borrower can qualify a bank holding or mortgage under the Federal Housing Administration’s mortgage lending program, based on consumer credit-quality ratings from the Federal Housing Commission. Although lenders may not apply the same criteria to all borrowers on a given credit score, the Federal Housing Administration may use any criteria specified by the Board of Federal Credit Union (FFCU) to determine whether an aggregate of borrowers using the Federal Housing Administration’s ratings would qualify for prime mortgage loans under this program.”[2] It goes on:
FIFO mortgage lenders can use their ratings to evaluate commercial mortgage rates. As seen in other countries such as Hong Kong, subprime-prime interest rates are generally not higher than that of many other borrowers, given that the Federal Reserve can, for example, lend at a lower fraction of the Federal Reserve’s (FOMC) loan balance.[2]
It is also helpful to be aware of the types of subprime lending the F.B.I. has identified as prime mortgage.[3] Most subprime borrowers meet Fannie Mae/BMO standards, but are not considered subprime borrowers due to their high rate of preponderance (purchasing power parity) among the borrowers included in our analysis. The F.B.I. in its 2005 annual report of the mortgage securities classification system said:
There is very limited market for subprime investments through the F.B.I. in 2008 under the mortgage insurance law, and no subprime securities. Fannie Mae is not considered a securitization bank; unlike other publicly traded securities, it is not associated with large-scale derivatives risks.
Of all of the mortgage insurance rules issued by the F.B.I., there is strong approval from Congress for subprime mortgage interest rates. There is no suggestion that the F.B.I. is simply asking for regulatory approval of mortgage interest rates, but there is ample evidence that if a lender could meet its high rate and it actually achieved and exceeded its projections under the mortgage lending program, that was a positive development.
In addition to subprime and subprime credit reporting, both non-prime and subprime subprime lending is also an investment in financial securities. There are many types of real estate brokerage and investment securities that can be used to finance low-interest rates on their products and services. In the case of non-prime and non-prime loans, there is significant leverage because of the mortgage risk. One of the most common kinds of real estate loans can be financed with a secured bond without having to pay any additional credit checking or capital gains taxes. The government considers the investment securities an investment in securities and is not exempt from credit check withholding laws. Although interest rates on these investment securities are higher than for all other types of securities, they usually do not exceed the Treasury’s loan cap. However, some investment securities are non-trading, so they are generally exempt from federal investment limitations.
According to our analysis of loan securities in the U.S., the average lending maturity time for both a non-prime and subprime subprime loan is one year. For loans of no greater than two years, the risk is lower than in our analysis because of different factors, ranging from short-selling or mortgage speculators, to high interest rates and complex business plans. Our analysis does not determine when
Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, allegedly poor credit histories (which can be extraordinarily inaccurate) and potentially adverse financial situations that are sometimes associated with subprime applicants. A subprime loan is offered at a rate higher than A-paper loans due to the perceived increased risk. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards. The most abusive subprime lending practices are, arguably, short-term “payday” loans.
Subprime lending is highly controversial. Opponents alleged subprime lenders engaged in predatory lending practices such as deliberately targeting borrowers who could not understand what they were signing, or lending to people who could never meet the terms of their loans. Many of these loans included exorbitant fees and hidden terms and conditions, and they frequently lead to default, seizure of collateral, and foreclosure.
There have been charges of mortgage discrimination on the basis of race.[2] Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.[3]
As the result of an ongoing lending and credit crisis in the subprime industry, and in the greater financial markets which began in the United States, the controversy surrounding subprime lending has expanded. This phenomenon has been described as a financial contagion which has led to a restriction on the availability of credit in world financial markets. Millions of borrowers are making inflated payments and cutting back on other parts of their budget. Hundreds of thousands of borrowers have been forced to default or file for bankruptcy. Hundreds of subprime lenders or brokers have closed, some have filed for bankruptcy and several have been acquired.
BackgroundSubprime lending evolved with the realization of a demand in the marketplace and businesses providing a supply to meet it coupled with the relaxation of usury laws and an unwillingness on the part of legislators at the national level to recognize the inherent risks to consumers. Traditional lenders are more cautious and have turned away a record number of potential customers.[citation needed] Statistically, approximately 25% of the population of the United States falls into this category.[citation needed]
In the third quarter of 2007, subprime ARMs only represented 6.8% of the mortgages outstanding in the US, yet they represented 43.0% of the foreclosures started. Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.[4]
The American Dialect Society designated the word “subprime” as the 2007 Word of the year on January 04, 2008. [5][edit] DefinitionFannie Mae has lending guidelines for what it considers to be “prime” borrowers on conforming mortgage loans – those loans they will buy or securitize into the credit market. Their standard provides a good comparison between those who are eligible for prime vs. subprime loans. Eligible borrowers for prime loans have a credit score above 620 (credit scores are between 350 and 850 with a median in the U.S. of 678 and a mean of 723), a debt-to-income ratio (DTI) no greater than 75% (meaning that no more than 55% of net income pays for housing and other debt), and a combined loan to value ratio of 90%, meaning that the borrower is paying a 10% downpayment.
[edit] Subprime lendersTo access this increasing market, lenders often take on risks associated with lending to people with allegedly poor credit ratings. Subprime loans are considered to carry a far greater risk for the lender due to the aforementioned credit risk characteristics