Subprime Mortgage Loans: What Are They?
Subprime Mortgage Loans: What Are They?
Subprime lending refers to the process of extending credit to higher-risk borrowers, also known as "B/C" or "nonconforming" credit. Loans to subprime borrowers benefit communities that have previously been underserved by traditional lenders. Subprime mortgage lending has exploded in recent years, with over 90% of all subprime mortgage loans originated in or after 1993. The estimated value of unpaid subprime mortgage loans surpassed $350 billion by the end of 1996. Subprime lenders originated over $125 billion in home equity loans in 1997 alone. Subprime loans have been a big part of the home equity industry, and they're only getting bigger. In 1996, subprime originations made up 11.5 percent of the overall home equity lending market; by the first half of 1997, they had increased to 15.5 percent. At the same time, the subprime market's company composition is changing. The rise in subprime mortgage lending by large national companies has been one of the market's most drastic shifts.
Since subprime lending is lucrative, demand from borrowers has increased, and secondary market opportunities are expanding, the subprime mortgage market has thrived. Subprime loans are usually priced higher in terms of interest and fees than traditional loans. When there are more credit risks involved, such as with subprime loans, higher rates and points can be necessary. However, critics claim that certain subprime lenders' interest rates and fees are unfair and much higher than appropriate to cover increased risks, particularly because these loans are backed by the value of a house. Some claim the federal legalization of certain state interest rate caps in 1980 contributed to lenders' high rates on first mortgages.
The subprime mortgage industry's relatively high-profit margins have driven secondary market demand from investors seeking higher-yielding securitized assets, particularly in an environment of generally low-interest rates. The subprime mortgage industry sold more than $38 billion in securities in 1996, the highest rise in securitizations in any lending industry segment that year. The expansion of the secondary market has aided the industry's growth by allowing lenders to collect funds on the open market to expand their subprime lending activities. Freddie Mac, one of the most important government-sponsored companies in the mortgage industry, recently announced plans to access the secondary market for subprime loans by buying a large number of “A-minus” subprime mortgages by 1998 and higher-risk “B and C” loans by 1999.
The subprime loan market is expected to continue to expand. Credit card delinquencies are on the rise, and personal bankruptcies are at all-time highs, both of which have a detrimental impact on borrowers' credit records and drive more people into higher-risk categories. Consumer spending, on the other hand, has remained high. These factors combine to expand the demand for subprime loans. Furthermore, due to a shift in the tax code that limits allowable interest deductions to those with a first mortgage, more borrowers may be pursuing home equity loans.
Comments
Post a Comment