In finance, subprime lending (also referred to as near-prime , subpar , non-prime , and < b> second opportunity loan ) means lending to people who may have difficulty maintaining a repayment schedule, sometimes reflecting backsliding, such as unemployment, divorce, medical emergencies, etc. Historically, subprime borrowers were defined to have a FICO score below 600, although "this varies over time and circumstances."
These loans are characterized by higher interest rates, poor quality assurance, and less favorable terms to compensate for higher credit risk. Many subprime loans are packaged in mortgage backed securities (MBS) and ultimately fail, contributing to the financial crisis of 2007-2008.
Proponents of subprime lending argue that this practice provides credit to people who do not have access to credit markets. Professor Harvey S. Rosen from Princeton University explains, "The main thing that innovations in the mortgage market have done over the last 30 years is to let the ones excluded: young, being discriminated against, people without much money in the bank used for advance payments."
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The term subprime refers to the credit quality of a particular borrower, who has a weak credit history and a greater credit risk than the primary borrower. When people become economically active, records are made with respect to their loans, income, and loan history. This is called a credit rating; although protected by privacy laws, this information is available to people who need to know (in some countries, loan applications specifically allow lenders to access the records). Subprime borrowers have credit ratings that may include:
- limited debt experience (so creditor assessors do not know, and assume the worst), or
- has no property assets that can be used as collateral (for the lender to sell in case of default)
- excessive debts (known earnings from individuals or families will not be enough to pay the living cost of the interest on repayment),
- payment history is late or sometimes missed so the loan period must be extended,
- failure to pay the full debt (default debt), and
- any legal assessment such as "pay order" or bankruptcy (sometimes known in the UK as a district court decision or CCJ).
The lender's standard for determining the risk category may also consider the size of the proposed loan, and also consider how the loan and the structured repayment plan, if it is a conventional repayment loan, mortgage loan, perpetual loan, and interest loan only, standard payment loan, amortized, credit card limit or other arrangements. The originators are also considered. Therefore, it is possible to borrow to borrowers with "prime" characteristics (eg high credit score, low debt) to be classified as subprima.
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Student loans
In the United States, the number of student loan debt has recently surpassed credit card debt, reaching $ 1 trillion in 2012. In other countries, the loan is borne by the government or sponsors. Many student loans are arranged in a special way because of the difficulty of predicting future earnings of students. These structures may be in the form of soft loans, income-sensitive payment loans, contingent repayment loans, and so on. Because student loans provide record paybacks for credit ratings, and may also indicate their earning potential, student loan failure can cause serious problems later in the day when individuals want to make substantial purchases with credits such as buying a vehicle or buying a home, because the defaulters tend to be classified as subprime, which means the loan can be rejected or more difficult to regulate and certainly more expensive than for someone with perfect payment records.
United States
Although there is no single, standard definition, in the United States subprime loans are typically classified as those where the borrower has a FICO score below 640. The term was popularized by the media during the subprime mortgage crisis or "credit crunch" in 2007. The loans does not meet underwriting guides Fannie Mae or Freddie Mac for prime mortgages is called "unsuitable" loans. Thus, they can not be packaged in Fannie Mae or Freddie Mac MBS.
A borrower with exceptional timely and full payment records will get the so-called A-paper loan. Borrowers with improper 'credit scores' can be judged as A-minus, B-paper, C-paper or D-paper loans, with progressive interest payments for less reliable payers to enable companies to 'risk share' defaults in a way fair among all its borrowers. Between A-paper and subprime in risk is Alt-A. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as a mortgage borrower with a FICO score below 680 while Alt-A is traditionally defined as a less complete documentation loan. The value of the US subprime mortgage was estimated at $ 1.3 trillion as of March 2007, with more than 7.5 million sub-prime unpaid first-lien loans.
Canada
The sub-prime market does not take over in Canada as far as in the US, where most mortgages come from third parties and then packaged and sold to investors who often do not understand the associated risks.
Subprime crisis
The subprime mortgage crisis arose from the 'bundling' of American subprime and the regular American mortgage into the SBM that is traditionally isolated from, and sold on a market separate from, the main loan. The 'bonds' of mixed mortgages (prime and subprime) are based on asset-backed securities so that the 'possible' return rate looks remarkable (because subprime lenders pay a higher premium on loans earned from real estate that can be sold, usually assumed "can not fail"). Many subprime mortgages have a low initial interest rate for the first two or three years and those who fail to 'exchange' on a regular basis initially, but ultimately, the greater part of the borrower begins to fail in surprising numbers. Bubble house prices are rising, property valuations plummet and real investment returns are unpredictable, and confidence in these instruments is collapsing, and all less than prime mortgages are considered to be virtually worthless toxic assets, regardless of their actual composition or performance. Since the "come-to-distribute" model is followed by many subprime mortgage proponents, there is little credit quality monitoring and little effort in remediation when this mortgage becomes problematic.
Source of the article : Wikipedia
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