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'''Subprime lending''' ('''near-prime''', '''non-prime''', or '''second chance''' lending) is a financial term that was popularized by the media during the [[subprime mortgage crisis|"credit crunch" of 2007]] and involves financial institutions providing credit to borrowers deemed "subprime" (sometimes referred to as "under-banked"). Subprime borrowers have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience. Although there is no standardized definition, in the US subprime loans are usually classified as those where the borrower has a credit score below a certain level, e.g. a [[FICO score]] below 660. Subprime lending encompasses a variety of credit types, including [[mortgage loan|mortgages]], auto loans, and [[credit card]]s. |
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Subprime could also refer to a security for which a return above the "prime" rate is received, also known as '''C-paper'''. In the United States, mortgage lending specifically, the term "subprime" can be applied to "non conforming" loans, those that do not meet [[Fannie Mae]] or [[Freddie Mac]] guidelines, generally due to one of an array of factors including the size of the loan, income to mortgage payment ratio or the quality of the documentation provided with the loan. The phrase also refers to [[bank loan]]s 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. |
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Stemming from the "credit crunch", attention has been drawn to recent subprime lending practices. It has been suggested that some lenders engaged in [[predatory lending]] practices. More extreme allegations included lenders deliberately targeting borrowers who may not have fully understood the terms of their loan, or lending to people who were never likely to afford the interest payments in the long-run. Many of these loans included exorbitant fees and hidden terms and conditions, and they frequently led to [[Default (finance)|default]], seizure of collateral, and [[foreclosure]]. While often defended on the basis of lending to borrowers with compromised credit histories, the ''[[Wall Street Journal]]'' reported in 2006 that 61% of all borrowers receiving subprime loans had [[credit scores]] high enough to qualify for prime conventional loans.<ref>Rick Brooks & Ruth Simon, "Subprime Debacle Traps Even Very Credit-Worthy: As Housing Boomed, Industry Pushed Loans To a Broader Market", ''Wall Street Journal'', December 3, 2007, at A1</ref> |
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Owing to the extent and the magnitude of the [[Subprime mortgage crisis|lending and credit crisis]], which affected the greater financial markets during 2008, the controversy surrounding subprime lending has expanded. |
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Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.<ref name="a">{{cite news |first=Austan |last=Goolsbee |authorlink=Austan Goolsbee |title='Irresponsible' Mortgages Have Opened Doors to Many of the Excluded |url=http://www.nytimes.com/2007/03/29/business/29scene.html?ex=1332820800&en=e09a15f9b118d649&ei=5088&partner=rssnyt&emc=rss |work=Economic Scene |publisher=[[The New York Times]] |date=2007-03-29 |accessdate=2007-08-12 |quote=Professor Rosen explains, "The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment."}}</ref> |
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==Background== |
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Subprime lending evolved with the realization of a demand in the marketplace for loans to less-than-ideal customers, those with imperfect credit.<ref name="oregon">Bjorhus, Jennifer ([[1998]]-[[October 6|10-06]]). "[http://web.archive.org/web/20000411090658/http://oregonlive.com/todaysnews/9810/st100626.html Mortgage lender starts liquidation]". [[Internet Archive|The Internet Archive]]. Archived from [http://oregonlive.com/todaysnews/9810/st100626.html the original] on [[2008]]-[[October 10|10-10]].</ref> Many companies entered the market when the [[prime interest rate]] was low, allowing modest subprime rates to flourish; others entered with the relaxation of [[usury]] laws.<ref name="oregon" /> Traditional lenders were more cautious and historically turned away potential borrowers with impaired or limited credit histories.<ref name="oregon" /> Statistically, approximately 25% of the population of the United States falls into this category.{{Fact|date=March 2007}} In 1998, the Federal Trade Commission estimated that 10% of new-car financing in the U.S. was provided by subprime loans, and that $125 billion of $859 billion total mortgage dollars were subprime.<ref name="oregon" /> |
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In the third quarter of 2007, subprime [[adjustable rate mortgage|ARM]]s 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.<ref>[http://www.mbaa.org/NewsandMedia/PressCenter/58758.htm Delinquencies and Foreclosures Increase in Latest MBA National Delinquency Survey<!-- Bot generated title -->]</ref> |
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==Subprime lenders== |
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To access this increasing market, lenders often take on risks associated with lending to people with poor credit ratings or limited credit histories. Subprime loans are considered to carry a far greater risk for the lender due to the aforementioned credit risk characteristics of the typical subprime borrower. Lenders use a variety of methods to offset these risks. In the case of many subprime loans, this risk is offset with a higher interest rate or various ''credit enhancements,'' such as private mortgage insurance (PMI). In the case of subprime [[credit card]]s, a subprime customer may be charged higher late fees, higher over-the-limit fees, yearly fees, or up-front fees for the card. Late fees are charged to the account, which may drive the customer over their credit limit, resulting in over-the-limit fees. These higher fees compensate the lender for the increased costs associated with servicing and collecting such accounts, as well as for the higher default rate. |
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== Borrower profiles == |
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Subprime loans can offer an opportunity for borrowers with a less-than-ideal credit record to become a home owner. Borrowers may use this credit to purchase homes, or in the case of a cash-out refinance, finance other forms of spending such as purchasing a car, paying for living expenses, remodeling a home, or even paying down on a high interest credit card. However, due to the risk profile of the subprime borrower, this access to credit comes at the price of higher interest rates, increased fees and other increased costs. Subprime lending (and mortgages in particular) provide a method of "credit repair"; if borrowers maintain a good payment record, they should be able to refinance back onto mainstream rates after a period of time. In the [[United Kingdom]], most subprime mortgages have a two or three-year tie-in, and borrowers may face additional charges for replacing their mortgages before the tie-in has expired. |
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Generally, the credit profile keeping a borrower out of a ''prime'' loan may include one or more of the following: |
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*Two or more loan payments paid past 30 days due in the last 12 months, or one or more loan payments paid past 90 days due the last 36 months; |
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*Judgment, [[foreclosure]], [[repossession]], or non-payment of a loan in the past; |
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*Bankruptcy in the last 7 years; |
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*Relatively high default probability as evidenced by, for example, a [[credit score (United States)|credit score]] of less than 620 (depending on the product/collateral), or other bureau or proprietary scores with an equivalent default probability likelihood. |
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*Accuracy of the credit line data obtained by the underwriter. |
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== Private label credit == |
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In the USA, this group of credit companies includes major banks such as [[Wells Fargo]], [[CitiBank]], [[GE Credit]], [[Household Finance]], and more. While it is not certain what percentage of subprime lending involves the private label branding of the retail chains (i.e [[The Gap]], [[Victoria's Secret]], [[Old Navy]], and most furniture and appliance retailers), most national retail chains use some form of subprime lending as a marketing strategy. Deferred interest programming may result in high default rates that must be offset by aggressive lending practices. It is common for a $200,000,000 furniture retailer to have 50% of their long-term business be derived from the direct result of private label credit promotions. {{Fact|date=July 2008}} |
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==Origination, securitization and servicing== |
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Some subprime originators (mortgage companies or brokers) formerly promoted residential loans with features that could trap low income borrowers into loans with increasing yield terms that eventually exceed borrower’s capability to make the payments. Most of these loans were originated for the purpose of selling them into securitization conduits, which are special purpose entities ([[REMIC]]s) that issue Residential Mortgage Backed Securities ([[RMBS]]), [[Bond (finance)|bonds]], [[security|securities]] and other investment vehicles for resale to pension funds and other fixed income investors. The same process takes place for some commercial mortgages ([[CMBS]]). |
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Some of these mortgage originators are owned or controlled by major financial institutions which provide a "Warehouse" line for their lending. For example, [[First Franklin]] was owned by [[Merrill Lynch]] and [[WMC Mortgage Corporation|WMC]] was owned by [[GE]]. These financial institutions then remain in control of these loans as "[[Trustee]]", "[[Servicer]]s" and "[[Controlling Class]]" of the REMIC trusts in hopes of deriving significant fees and other income from management of [[Taxes]], Insurance and Repair Reserve Funds required by the terms of these [[mortgages]]. |
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In most cases, should these loans default, the servicing is passed to "[[Special Servicer]]s" who derive "Workout", "[[Foreclosure]]s" and [[Real estate owned]] (REO) management fees. The Special Servicers are directed by "[[Directing Class]]" or "[[Controlling Class]]" which comprise of majority holders of the lowest class of REMIC Trust securities also referred to as "[[First Loss]]" or "[[B-Piece]]" holders. |
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The shortfall of loan repayment is usually repaid as a result of "[[Repurchase Demand]]" by Special Servicer on [[GSE]] or loan seller to REMIC Trust also called "[[Loan Depositor]]." The purchased collateral at auctions by [[Special Servicers]] are referred to as [[Real estate owned|REO]] properties which then can be marketed and sold for market value. [[Special Servicers]] usually keep the "Upside" or difference between auction price and market sale of the collateral. These foreclosure fees and REO income form a major incentive for Servicers to purchase the "[[Servicing Rights]]" of the REMIC trusts from Trustees who, depending on the terms of the Pooling and Servicing Agreement (PSA), have the authority to replace Servicers. It is not uncommon for a predatory Servicer to pay millions of dollars to procure the "[[Servicing Rights]]" of the REMIC trusts in hopes of successful foreclosures and equity stripping from Borrowers, Guarantors, Loan Sellers and Investors. |
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REMIC Trusts are "Passive" or "Pass-Through" Entities under the IRS code and are not taxed at trust level. However, the bond-holders are expected to be taxpaying entities and are taxed on interest income distributed by the REMIC trusts. REMIC trusts are forbidden from any other business activities and are taxed 100% on any other income they may generate which is referred to as "[[Prohibited Income]]" under IRC 860 Code. |
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==Types== |
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===Subprime mortgages=== |
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Like other subprime loans, subprime [[mortgage]]s are defined by the financial and credit profile of the consumers to which they are marketed. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, [[debt-to-income ratio]]s, or other criteria that may encompass borrowers with incomplete credit histories." |
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Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. Subprime borrowers are generally defined as individuals with limited income or having FICO [[credit score]]s below <nowiki>620</nowiki> on a scale that ranges from 300 to 850.<ref>{{Citation | last = Lee | first = Mara | title = Subprime Mortgages: A Primer | newspaper = NPR | url = http://www.npr.org/templates/story/story.php?storyId=9085408}}</ref> Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender. |
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Although most home loans do not fall into this category, subprime mortgages proliferated in the early part of the 21st Century. About 21 percent of all mortgage originations from 2004 through 2006 were subprime, up from 9 percent from 1996 through 2004, says John Lonski, [[chief economist]] for [[Moody's|Moody's Investors Service]]. Subprime mortgages totaled $600 billion in 2006, accounting for about one-fifth of the U.S. home loan market[http://www.usatoday.com/money/perfi/columnist/waggon/2007-03-15-subprime-woes_N.htm]. |
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As with other types of mortgage, various special loan features are available with subprime mortgages, including: |
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*[[interest-only]] payments, which allow borrowers to pay only interest for a period of time (typically 5–10 years); |
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*"pay option" loans, usually with adjustable rates, for which borrowers choose their monthly payment (full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan); |
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*and so-called "hybrid" mortgages with initial fixed rates that sooner or later convert to adjustable rates. |
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This last class of mortgages has grown particularly popular among subprime lenders since the 1990s. Common subprime hybrids include the "2-28 loan", which offers a low initial interest rate that stays fixed for two years after which the loan resets to a higher adjustable rate for the remaining life of the loan, in this case 28 years. The new interest rate is typically set at some margin over an index, for example, 5% over a 12-month [[LIBOR]]. Variations on the "2-28" include the "3-27" and the "5-25". |
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===Subprime credit cards=== |
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Credit card companies in the United States began offering subprime credit cards to borrowers with low credit scores and a history of defaults or bankruptcy in the 1990s when usury laws were relaxed. These cards usually begin with low credit limits and usually carry extremely high fees and interest rates as high as 30% or more.<ref>[http://www.fool.com/ccc/secrets/secrets02.htm "Need a Loan? No Problem."]</ref> In 2002, as economic growth in the United States slowed, the default rates for subprime credit card holders increased dramatically, and many subprime credit card issuers were forced to scale back or cease operations. |
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In 2007, many new subprime credit cards began to sprout forth in the market. As more vendors emerged, the market became more competitive, forcing issuers to make the cards more attractive to consumers. Interest rates on subprime cards now start at 9.9% but in some cases still range up to 24% [[Annual percentage rate|APR]]. |
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In some situations, subprime credit cards may help a consumer improve poor credit scores. Most subprime cards report to major credit reporting agencies such as TransUnion and Equifax, but in the case of "secured" cards, credit scoring often reflects the nature of the card being reported and may or may not consider it. Issuers of these cards claim that consumers who pay their bills on time should see positive reporting to these agencies within 90 days. |
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==Proponents== |
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Individuals who have experienced severe financial problems are usually labeled as higher risk and therefore have greater difficulty obtaining credit, especially for large purchases such as automobiles or real estate. These individuals may have had job loss, previous debt or marital problems, or unexpected medical issues, usually unforeseen and causing major financial setbacks. As a result, late payments, charge-offs, repossessions and even bankruptcy or foreclosures may result. |
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Due to these previous credit problems, these individuals may also be precluded from obtaining any type of conventional loan. To meet this demand, lenders have seen that a tiered pricing arrangement, one which allows these individuals to receive loans but pay a higher interest rate and higher fees, may allow loans which otherwise would not occur. |
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From a servicing standpoint, these loans have a statistically higher rate of default and are more likely to experience repossessions and charge offs. Lenders use the higher interest rate and fees to offset these anticipated higher costs. |
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Provided that a consumer enters into this arrangement with the understanding that they are higher risk, and must make diligent efforts to pay, these loans do indeed serve those who would otherwise be underserved. Continuing the example of an auto loan, the consumer must purchase an automobile which is well within their means, and carries a payment well within their budgets. |
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==Criticism== |
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{{Rquote|right|''[[Subprime]]'' is [[Wall Street]]'s [[euphemism]] for ''[[junk]]''.|[[Andy Serwer]] and [[Allan Sloan]]|[http://www.time.com/time/business/article/0,8599,1842123,00.html How Financial Madness Overtook Wall Street], [[TIME]], September 18, 2008''}} |
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Capital markets operate on the basic premise of risk versus reward. Investors taking a risk on stocks expect a higher rate of return than do investors in risk-free [[Treasury bills]], [[Guaranteed Investment Certificate]]s, etc. which are backed by the full faith and credit of the issuing country or institution. The same goes for loans. Allegedly less creditworthy subprime borrowers represent a riskier investment, so lenders will charge them a higher interest rate than they would charge a prime borrower for the same loan. |
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To avoid high initial mortgage payments, many subprime borrowers took out [[adjustable-rate mortgages]] (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up costing much more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,220. A 6-percentage-point increase in the rate caused slightly more than an 75% increase in the payment.[http://www.fool.com/investing/value/2007/07/10/the-skinny-on-subprime.aspx] This is even more apparent when the lifetime cost of the loan is considered (though most people will want to refinance their loans periodically). The total cost of the above loan at 4% is $864,000, while the higher rate of 10% would incur a lifetime cost of $1,367,280. |
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On the other hand, interest rates on ARMs can also go down - in the US, some interest rates are tied to federal government-controlled interest rates, so when the Fed cuts rates, ARM rates go down, too. Most subprime ARM loans are tied to [[London Interbank Offered Rate| LIBOR]] ('''L'''ondon '''I'''nter'''b'''ank '''O'''ffered '''R'''ate - a rate trading system originating in Britain). ARM interest rates usually adjust once a year or per quarter, and the rate is based a calculation specified in the loan documents. Also, most ARMs limit the amount of change in a rate.[http://en.wikipedia.org/wiki/Adjustable_rate_mortgages] |
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===Mortgage discrimination=== |
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{{main|Mortgage discrimination}} |
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Some subprime lending practices have raised concerns about mortgage discrimination on the basis of race. The [[NAACP]] filed a lawsuit in federal court in Los Angeles against 12 mortgage lenders. The lawsuit accuses the companies of steering black borrowers into subprime loans.<ref name="nytimes">''[http://www.nytimes.com/2007/10/15/nyregion/15subprime.html?ex=1350187200&en=a9978e04a9864642&ei=5088&partner=rssnyt&emc=rss Study Finds Disparities in Mortgages by Race]'' [[The New York Times]] By MANNY FERNANDEZ Published: October 15, 2007</ref> [[Black]] and other minorities disproportionately fall into the category of "subprime borrowers",even when median income levels were comparable, home buyers in minority neighborhoods were more likely to get a loan from a subprime lender.<ref name="nytimes" /> Interest rates and the availability of credit are often tied to credit scores, and the results of a 2004 Texas Department of Insurance study found that of the 2 million Texans surveyed, "black policyholders had average credit scores that were 10% to 35% worse than those of white policyholders. Hispanics' average scores were 5% to 25% worse, while Asians' scores were roughly the same as whites."<ref>{{Citation| last = Weston| first = Liz Pulliam| title = Is your insurer discriminating against you?| newspaper = MSN Money| url =http://articles.moneycentral.msn.com/Insurance/KnowYourRights/IsYourInsurerDiscriminatingAgainstYou.aspx}}</ref> |
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==Definition== |
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The meaning of "subprime" changed during the last quarter of the 20th century. According to the ''[[Oxford English Dictionary]]'', in 1976 a subprime loan was one with a [[Prime rate|below-prime]] [[interest rate]]; it wasn't until 1993 that the term took on its present meaning.<ref>[http://www.oed.com/news/updates/newwords0806.html Notes on OED's June 2008 release of new words] from the ''[[Oxford English Dictionary]]'' website</ref> |
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The [[American Dialect Society]] designated the word "subprime" as the 2007 [[word of the year]] on January 4, 2008.<ref>[http://www.americandialect.org/index.php/amerdial/subprime_voted_2007_word_of_the_year/ 2007 Word of the Year] from the [[American Dialect Society]]</ref> |
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By comparison, [[Federal National Mortgage Association|FNMA]] prime loans go to borrowers with |
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*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), |
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*a [[debt-to-income ratio]] no greater than 45% (meaning that no more than 45% of gross income pays for housing and other debt), and |
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*a combined loan-to-value ratio of 90% (meaning that the borrower is paying a 10% down payment). |
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==U.S. subprime mortgage crisis== |
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{{Uncleardate|date=August 2007}} |
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{{main|Subprime mortgage crisis}} |
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Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a [[subprime meltdown|meltdown]]. A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently [[New Century|New Century Financial Corporation]], previously the nation's second biggest subprime lender.<ref>Morgenson, Gretchen. [http://www.nytimes.com/2007/03/11/business/11mortgage.html "Crisis Looms in Market for Mortgages"]. The New York Times, March 11, 2007. Retrieved April 19, 2007.</ref> The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole. The crisis is ongoing and has received considerable attention from the U.S. media and from lawmakers during the first half of 2007.<ref>http://biz.yahoo.com/ap/070312/mortgage_meltdown_q_a.html?.v=1</ref><ref>[http://www.ml-implode.com/ The Mortgage Lender Implode-O-Meter - tracking the housing finance breakdown, related to Alt-A and subprime mortgages, lending fraud, predatory lending, housing bubble, mortgage banking, foreclosures, debt, consolidation, lawyers, class-action lawsuits<!-- Bot generated title -->]</ref> |
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However, the crisis has had far-reaching consequences across the world. Tranches of sub-prime debts were repackaged by banks and trading houses into attractive-looking [[special purpose entity|investment vehicles]] and [[securitization|securities]] that were snapped up by banks, traders and hedge funds on the US, European and Asian markets. Thus when the crisis hit the subprime mortgage industry, those who bought into the market suddenly found their investments near-valueless - or impossible to accurately value. Being unable to accurately assess the value of an asset leads to uncertainty, which is never healthy in an investment climate. With market paranoia setting in, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary, run-of-the-mill and healthy businesses across the world with no direct connection whatsoever to US sub-prime suddenly started facing difficulties or even folding due to the banks' unwillingness to budge on credit lines. |
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Observers of the meltdown have cast blame widely. Some have highlighted the practices of subprime lenders and the lack of effective government oversight.<ref name="s200703">{{cite web|url=http://banking.senate.gov/index.cfm? Still others have cited government mandated affirmative action based lending in order to increase home ownership among minorities. Fuseaction=Articles.Detail&Article_id=125&Month=3&Year=2007 |title=Opening Statement of Chairman Chris Dodd - Hearing on Mortgage Market Turmoil: Causes and Consequences |publisher=[[United States Senate]]|date=2007-03-22|quote=people paying the price for the regulators’ inaction are homeowners across America struggling ... Homeownership is supposed to be a ticket to the middle class. Predatory lending reverses the trip.}}</ref> Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the underlying loans. Borrowers have also been criticized for entering into loan agreements they could not meet.<ref name="c2007">{{cite news |first=Les |last=Christie |title=Subprime blame game|url=http://money.cnn.com/galleries/2007/real_estate/0704/gallery.paly_the_subprime_blame_game/index.html?section=money_realestate|work=CNNMoney.com|publisher=[[CNN]]|accessdate=2007-08-12|quote=In the end, they are responsible for deciding that they could afford the mortgage and signing the papers. No one forced them to take on a loan they couldn't afford.}}</ref> |
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Many accounts of the crisis also highlight the role of falling home prices since 2005. As housing prices rose from 2000 to 2005, borrowers having difficulty meeting their payments were still building equity, thus making it easier for them to refinance or sell their homes. But as home prices have weakened in many parts of the country, these strategies have become less available to subprime borrowers.<ref>Morgenson, Gretchen. [http://query.nytimes.com/gst/fullpage.html?res=9D02E2D8173FF93BA35757C0A9619C8B63 "FAIR GAME; Home Loans: A Nightmare Grows Darker"]. ''The New York Times'', April 8, 2007. Retrieved on March 23, 2008.</ref> |
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Several industry experts have suggested that the crisis may soon worsen. [[Lewis "Lewie" Ranieri]], formerly of [[Salomon Brothers]], considered the inventor of the [[Mortgage-backed security|mortgage-backed securities]] market in the 1970s, warned of the future impact of mortgage defaults: "This is the leading edge of the storm. … If you think this is bad, imagine what it's going to be like in the middle of the crisis."<ref>[http://www.thetrumpet.com/index.php?page=article&id=3043 "Has the Housing Crisis Finally Arrived?"] The Trumpet.com, March 29, 2007. Retrieved on April 19, 2007.</ref> Echoing these concerns, consumer rights attorney Irv Ackelsberg predicted in testimony to the U.S. Senate Banking Committee that five million foreclosures may occur over the next several years as interest rates on subprime mortgages issued in 2004 and 2005 reset from the initial, lower, fixed rate to the higher, floating adjustable rate or "adjustable rate mortgage".<ref>[http://money.cnn.com/2007/03/22/real_estate/subprime_lenders_deny_responsibility/index.htm?postversion=2007032218 Subprime lenders deny responsibility - Mar. 22, 2007<!-- Bot generated title -->]</ref> |
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Other experts have raised concerns that the crisis may spread to the so-called [[Alt-A|Alternative-A]] (Alt-A) mortgage sector, which makes loans to borrowers with better credit than subprime borrowers at not quite prime rates.<ref>Fleckenstein, Bill. [http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/NextTheRealEstateMarketFreeze.aspx "Next: The real estate market freeze"]. MSN.com, March 12, 2007. Retrieved on April 19, 2007.</ref> |
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Some economists, including former Federal Reserve Board chairman [[Alan Greenspan]] in March 2007, expected subprime-mortgage defaults to cause problems for the economy, especially so if US home prices fell.<ref>Strasburg, Jenny. [http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a8qWYRxr5s4c "Subprime Defaults to Soar, Hurt Lenders, Funds Say".] Bloomberg.com, March 15, 2007. Retrieved on April 19, 2007.</ref><!-- bloomberg source covers lenders views of mortgage-backed bonds, and Greenspan's expecting "defaults to ripple through other areas of the economy" --> |
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Other economists, such as Edward Leamer, an [[economist]] with the [[UCLA]] Anderson Forecast, doubts home prices will fall dramatically because most owners won't have to sell, but still predicts home values will remain flat or slightly depressed for the next three or four years.<ref>Associated Press. [http://www.msnbc.msn.com/id/17584725/ "Will subprime mess ripple through economy"]. MSN.com, March 13, 2007. Retrieved on April 19, 2007.</ref> |
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In the UK, some commentators have predicted that the [[Residential property market in the United Kingdom|UK housing market]] will in fact be largely unaffected by the US subprime crisis, and have classed it as a localised phenomenon.<ref>Durrant, Brian. [http://www.moneyweek.com/file/28100/will-the-us-subprime-crisis-cause-a-uk-property-meltdown.html Will the US subprime crisis cause a UK property meltdown?]''[[MoneyWeek]]'', April 13, 2007</ref> However, in September 2007 [[Northern Rock]], the UK's fifth largest mortgage provider, had to seek emergency funding from the [[Bank of England]], the UK's central bank as a result of problems in international credit markets attributed to the sub-prime lending crisis. |
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As the crisis has unfolded and predictions about it strengthening have increased, some Democratic lawmakers, such as Senators [[Charles Schumer]], [[Robert Menendez]], and [[Sherrod Brown]] have suggested that the U.S. government should offer funding to help troubled borrowers avoid losing their homes.<ref>{{cite web|url=http://www.boston.com/news/education/higher/articles/2007/04/11/washington_sees_housing_woes_worsening/?page=2|title="U.S. Housing Aid needed, Schumer says"|date=[[2007-04-11]]|accessdate=2007-04-19|author=Zibel, Alan and Dan Caterinicchia|Publisher=Boston.com}}</ref> Some economists criticize the proposed bailout, saying it could have the effect of causing more defaults or encouraging riskier lending. |
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On August 15, 2007, concerns about the subprime mortgage lending industry caused a sharp drop in stocks across the [[Nasdaq]] and [[Dow Jones]], which affected almost all the stock markets worldwide. Record lows were observed in stock market prices across the Asian and European continents.<ref>{{cite web|url=http://news.yahoo.com/s/ap/20070815/ap_on_bi_ge/world_markets|title="European markets slide; Asia closes down"|date=[[2007-08-15]]|accessdate=2007-08-15|author=TOBY ANDERSON, AP Business Writer|Publisher=news.yahoo.com}}</ref> The U.S. market had recovered all those losses within 2 days. |
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Concern in late 2007 increased as the August market recovery was lost, in spite of [[Federal Reserve System| the Fed]] cutting interest rates by half a point (0.5%) on September 18 and by a quarter point (0.25%) on October 31. |
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Stocks are testing their lows of August now. |
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On December 6, 2007, President [[George W. Bush|Bush]] announced a plan to voluntarily and temporarily freeze the mortgages of a limited number of mortgage debtors holding [[adjustable rate mortgage|ARM]]s by the [[Hope Now Alliance]]. He also asked members of Congress to: 1. Pass legislation to modernize the FHA. 2. Temporarily reform the tax code to help homeowners refinance during this time of housing market stress. 3. Pass funding to support mortgage counseling. 4. Pass legislation to reform Government Sponsored Enterprises (GSEs) like Freddie Mac and Fannie Mae.<ref>[http://www.whitehouse.gov/news/releases/2007/12/20071206-7.html Fact Sheet: Helping American Families Keep Their Homes<!-- Bot generated title -->]</ref> |
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In late March 2008, Friedman Billings Ramsey<ref>[http://www.fbr.com FBR | Redirect to FBR Capital Markets and FBR Group<!-- Bot generated title -->]</ref> reported the default rate on securitized subprime loans hit 25.2% in December 2007. Alt-A loan defaults also increased to 8.65%. (The default rate includes loans 90 days or more past due, in foreclosure, and real estate owned.) |
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==See also== |
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*[[Subprime mortgage crisis]] |
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*[[Adverse credit history]] |
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*[[Hope Now Alliance]] |
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*[[Negative amortization]] |
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*[[Carry trade]] |
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*[[collateralized mortgage obligation]] - "CMO" |
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==References== |
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{{reflist}} |
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==External links== |
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*{{cite web|url=http://www.businessweek.com/bwdaily/dnflash/content/mar2007/db20070302_477856.htm|title=Why Subprime Lenders Are In Trouble|date=2007-03-02|publisher=[[Business Week]]|author=Peter Coy}} |
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*{{cite web|url=http://ssrn.com/abstract=1020396|title=Understanding the Subprime Mortgage Crisis|date=2007-10-10|publisher=[[SSRN]]|author=Yuliya Demyanyk and Otto Van Hemert}} |
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*{{cite web|url=http://www.hud.gov/offices/fheo/lending/subprime.cfm|title=Subprime Lending|publisher=[[United States Department of Housing and Urban Development]]|date=2006-03-24}} |
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*{{cite web|url=http://www.federalreserve.gov/boarddocs/Speeches/2004/20040521/default.htm|title=Subprime Mortgage Lending: Benefits, Costs, and Challenges|date=2004-05-21|publisher=[[Federal Reserve System|Board of Governors of the Federal Reserve System]]|author=[[Edward M. Gramlich]]}} |
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*{{cite web|url=http://news.bbc.co.uk/2/hi/business/5144662.stm|title=Q&A: Sub-prime lending|publisher=[[BBC]]|date=2007-03-14}} |
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*{{cite web|url=http://dallasfed.org/research/eclett/2007/el0711.pdf|title=The Rise and Fall of Subprime Mortgages|date=2007-11|publisher=[[Federal Reserve Bank of Dallas]]}} |
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*{{cite web|url=http://news.bbc.co.uk/2/hi/business/7188909.stm|title=Jan 15 2008 Main sub-prime losses reported]}} |
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*[http://uc.princeton.edu/main/index.php?option=com_content&task=view&id=2813&Itemid=1 "From Sub-Prime to Prime-Time - A Debate on the Current Financial Crisis"] A panel of economists at Columbia University, School of International and Public Affairs, Feb 28, 2008. |
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*[http://blog.cleveland.com/metro/2008/05/the_subprime_house_of_cards.html "Sub-Prime Trail of Deceit"] The Cleveland Plain-Dealer investigation into the complicity of lenders in the Cleveland foreclosure mess. May 11, 2008 |
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[[Category:Mortgage]] |
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[[Category:Interest rates]] |
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[[Category:Personal finance]] |
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[[Category:Financial economics]] |
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[[Category:United States housing bubble]] |
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[[br:Subprime]] |
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[[ca:Crèdit Subprime]] |
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[[da:Subprime-lån]] |
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[[es:Crédito subprime]] |
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[[eo:Subprime]] |
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[[id:Kredit subprima]] |
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[[it:Subprime]] |
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[[he:הלוואת סאבפריים]] |
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[[ja:サブプライムローン]] |
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[[no:Subprime]] |
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[[pl:Subprime loan]] |
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[[sv:Subprimelån]] |
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[[th:สินเชื่อซับไพรม์]] |
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[[zh:次级贷款]] |
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