What Are Subprime Mortgage Loans

What Are Subprime Mortgage Loans



What Are Subprime Mortgage Loans?
Subprime lending refers to​ the​ extension of​ credit to​ higher-risk borrowers,​ a​ practice also commonly referred to​ as​ B/C or​ nonconforming credit .​
Loans to​ subprime borrowers serve communities that may have been underserved by other lenders in​ the​ past .​
In recent years,​ subprime mortgage lending has grown dramatically,​ with over 90% of​ all subprime mortgage loans made in​ or​ after 1993 .​
By the​ end of​ 1996,​ the​ total value of​ outstanding subprime mortgage loans exceeded $350 billion .​
In 1997 alone,​ subprime lenders originated over $125 billion in​ home equity loans .​
Subprime loans have become a​ significant and growing part of​ the​ home equity market .​
Subprime originations constituted 11.5% of​ the​ total home equity lending market in​ 1996; by the​ first half of​ 1997,​ they had grown to​ 15.5% of​ this market .​
At the​ same time,​ the​ composition of​ companies involved in​ the​ subprime market is​ evolving .​
One of​ the​ dramatic changes in​ this market has been the​ growth in​ subprime mortgage lending by large corporations that operate nationwide.
The subprime mortgage market has flourished because such lending has been profitable,​ demand from borrowers has increased,​ and secondary market opportunities are growing .​
Lenders typically price subprime loans to​ consumers at​ rates of​ interest and fees higher than conventional loans .​
Higher rates and points can be appropriate where greater credit risks are involved,​ as​ is​ often the​ case with subprime loans .​
Critics assert,​ however,​ that the​ interest rates and fees charged by some subprime lenders are excessive,​ and much higher than necessary to​ cover increased risks,​ particularly since these loans are secured by the​ value of​ a​ home .​
Some attribute lenders' high rates on​ first mortgages in​ part to​ federal deregulation of​ certain state interest rate ceilings in​ 1980.
The relatively high profit margins in​ the​ subprime mortgage industry have fueled demand in​ the​ secondary market from investors seeking higher-yielding securitized assets,​ especially in​ an​ environment of​ generally low interest rates .​
In 1996,​ the​ subprime mortgage sector issued over $38 billion in​ securities,​ the​ largest increase in​ securitizations for any lending industry sector in​ that year .​
The secondary market's expansion has,​ in​ turn,​ helped to​ sustain growth in​ the​ industry by enabling lenders to​ raise funds on​ the​ open market to​ expand their subprime lending activities .​
Freddie Mac,​ one of​ the​ primary government-sponsored enterprises involved in​ the​ purchase of​ mortgages,​ recently announced plans to​ enter the​ secondary market in​ subprime loans by purchasing significant numbers of​ a​ minus subprime mortgages by 1998 and the​ higher-risk B and C loans by 1999.
The market for subprime loans is​ expected to​ continue growing .​
Credit card delinquencies are rising and personal bankruptcies are at​ record levels,​ which negatively affect borrowers' credit histories,​ pushing more consumers into higher risk categories .​
Meanwhile,​ consumer spending continues to​ be strong .​
Together,​ these factors increase the​ market for subprime loans .​
In addition,​ more borrowers generally may be seeking home equity loans due to​ the​ change in​ the​ tax code limiting allowable interest deductions to​ those on​ a​ first mortgage.




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