Subprime mortgage lending

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Sub-prime mortgage lending involves lending to borrowers who do not qualify for loans from mainstream lenders. Some sub-prime lenders are independent, but increasingly they are affiliates of mainstream lenders operating under different names. In U.S. mortgage lending, the term refers to loans that do not meet Fannie Mae or Freddie Mac guidelines for a number of reasons, including the borrower's credit rating, income and job history. It can also refer to bank loans taken on property that cannot be sold on the primary market.

Rates and fees for sub-prime lenders are higher than mainstream lenders because of the greater risk and higher costs of sub-prime lending - the latter because more applications are rejected and marketing costs are higher.[1] Default rates on oversold subprime mortgages were the catalyst that sparked 2007's meltdown in the mortgage-backed securities market and later the 2007-2008 credit crisis.

In August of 2008, nonprofit, nonpartisan research and policy organization Center For Responsible Lending projected that almost 2.2 million subprime foreclosures would occur primarily in late 2008 through the end of 2009, up from the organization's original 1.1 million estimate made in 2006. Additionally, it was estimated that 40.6 million homes in neighborhoods surrounding the foreclosures would suffer price declines averaging over $8,667 per home and resulting in a $352 billion total decline in property values.[2]

References

  1. "What is a Sub-Prime Mortgage Lender?". mtgprofessor.com.
  2. Updated Projections of Subprime Foreclosures in the United States and Their Impact on Home Values and Communities. Center For Responsible Lending.

Resources

  • Give Credit Where Credit is Due: Increasing Access to Affordable Mainstream Credit When Using

Alternative Data by Michael A. Turner, Alyssa Stewart Lee, Ann Schnare, Robin Varghese, and Patrick D. Walker, December 2006.[1]

References

  1. Give Credit Where Credit is Due: Increasing Access to Affordable Mainstream Credit Using Alternative Data. PERC.