Here in December of 2007, it is difficult not to hear and read about the burgeoning subprime crisis. This perfect fiscal subprime storm has led to startlingly high default rates on home mortgages. Subprime loans were issued back when the real estate market was fat, dumb and happy, and those subprime loans are now bearing rotten fruit.
Subprime, subprime, subprime!
It's semantics, I know, but it still bugs me. I’d guess that most folks believe that “subprime” refers to the interest rates of these loans. “Sub” means below, obviously. And “prime” clearly must refer to the mythical prime rate. So it must be that really low (subprime) loans were issued to people, getting them into loans they couldn’t afford once those rates adjusted, right?
Wrong. Within the mortgage industry, it is the borrower that the term “subprime” modifies. . . borrowers whose credit scores (generally below 620 or so) are so low, or whose debt-to-income ratios are so high as to make them unqualified to receive traditional loans at decent rates.
“Subprime” does not speak to the rates involved in the loans themselves. In a quirk of language, subprime loans are typically loans issued significantly above standard rates because the borrowers are unqualified for traditional, more favorable loans. Adjustable rates, balloon payments and other monkey business are common secondary characteristics of such loans.
Over time, media reports will continue to screw this up. Reports written by very knowledgeable financial experts and published in respectable outlets will be less than clear in the language they use. And fewer and fewer people will realize that “subprime” refers to the condition of the borrower and not to the loan rates themselves.
3 comments:
Actually, I thought that was pretty clear. At the least, when it first came up in a big way, all the reports made this clear.
And I am a financial idiot, so I'd fail to understand this if there was a chance.
So I'm shooting off the cuff here as I wait for my query to run and I have this observation about the "mortgage crisis". It's a situation of people who are already in a credit crunch and companies that are trying to make money off of them by charging them more for what we know they aren't good at which is paying their bills. Am I supposed to be surprised that this scenario is not working out so well? This is not a comment about why and how people got into a situation of poor credit or a judgment of them but it seems that this un-named mass of people below the 620 credit score got there because of a track record of not paying bills and/or low debit to assets/income ratios.
So the question really is. . . if people enter into bad loans because they have no other legal options, then who is at fault? The borrower for having screwed up in the past? The system for not offering other less rapacious options for people with less-than-great credit? Or specific lenders who target people who are most vulnerable? I'd argue that there is enough fault to go around to each of those groups.
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