General Question

u101547's avatar

In real estate mortgage loans, what does "sub-prime" mean, (by strict, dictionary definition,) and more importantly, what does it mean, (its implications and connotations)?

Asked by u101547 (203points) November 7th, 2007

How did so many people in America get sub-prime financing for their home mortgages if it was wrong, and if it wasn’t wrong why is our nation’s economy being hurt so bably by these sub-prime mortgages?

Observing members: 0 Composing members: 0

9 Answers

cwilbur's avatar

Sub-prime loans are those made to people with credit that is poor but not so poor as to disqualify them altogether. People with good credit are considered “prime,” because a lender isn’t risking much by lending them money; people with poor credit are considered “subprime,” because the lender has to take a risk and make a judgment call.

They got the loans because the lenders took a gamble on them: the lenders figured that the price of real estate would keep going up, and that the higher interest rates on sub-prime loans would make up for any losses they took from people defaulting on the loans. The people in question also bought the biggest houses they could afford they payments for, and as many of the loans in question were adjustable-rate mortgages, when the rate went up, the buyers found themselves unable to afford the new payments.

Our nation’s economy is being hurt because these lenders treated the housing bubble as if it were permanent, and made assumptions that the current rate of growth in housing costs would continue indefinitely, and because the people who took out the loans didn’t adequately read the fine print. When a large number of people do something stupid, it tends to hurt economies.

It’s hard to say that the lending was wrong: certainly, the lenders knew they were taking advantage of people who were desperate for the loans, the sellers knew that the low interest rates and skyrocketing housing costs meant they could ask absurd amounts for their houses, and the buyers ignored the long-term cost of the loans while focusing on the short-term size of the payment. There’s more than enough blame to go around.

It’s also a circle: if the economy were not doing poorly overall, the people who took out subprime loans would be able to pay them off, and the subprime lenders would not be having financial crises. Personally, I think the subprime housing problem is much more of a symptom of a deeper problem than a cause of problems in itself.

Mangus's avatar

An additional note: subprime only refers to the practice of lending to people whose credit/income makes the loan a questionable investement, with the definition of prime and subprime that cwilbur uses. But it doesn’t have to mean any specific lending strategy. It’s mostly associated with variable-rate lending, but there are other dark alleys available.

For example, some states have a zero-deficiency law, that says if you default on your mortgage and the house forecloses and sells at auction for LESS than the money owed, the lender CANNOT come after you for the difference. This is good for borrowers. So, another type of sub-prime loan involves lending a second mortgage for the down payment (getting a sub-prime borrower into a game s/he couldn’t otherwise get into). That second mortage isn’t covered by the zero-deficiency law, so after a default the borrower can end up with 20 or 30,000 in unsecured debt.

codydog's avatar

How does a heloc work? Is it always interest only payments? How does the principle go down?

allengreen's avatar

The above answers are wrong. Sub prime means any loan that does not conform with the Fannie Mae or Freddie Mac guidlines. It does not refer to bad credit always. For example, someone with great credit but a high loan to value ratio would be sub prime. Or a self employeed person who cannot document income with tax returns, but instead documents income with bank statements would be sub prime.

The sub prime crisis is a blip compared to the Alt A and Prime blow ups we will see in the next 6 to 12 months.

kawan222's avatar

I have never seen a more thorough discussion of this topic.

Did you guys type that all out on the iPhone? And if so, how the he’ll are you typing? 2 thumbs? 1 index?

Good work.

kawan222's avatar

gotta love that auto-correct “hell” to “he’ll”

YARNLADY's avatar

The first two answers are good examples of a few of the varieties of sub-prime loans, and there are not ‘wrong’, but merely incomplete.

This site has an excellent article about the meaning of subprime loans

ItsAHabit's avatar

Unfortunately, there was political pressure to make sub-prime loans available, seemingly easy money to be made offering them, and plenty of buyers who wanted more house than they could afford. Not a good combination of factors.

RajeshJha's avatar

House is very important for anyone. Now everyone can buy house with the help of loan. Poor people can get easily this service.

Answer this question




to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
Knowledge Networking @ Fluther