The term `subprime lending'
refers to the practice of
making loans available to borrowers who do not qualify
for normal market interest rate loans due to various risk factors, such
as income level, size of the down payment made, credit history,
and employment status. Subprime mortgages are defined as
housing loans that do not conform to the criteria of prime mortgages and
also have a lower probability of full repayment of mortgages.
Subprime mortgage loans are made to home loan borrowers who are having
higher credit risks compared to prime mortgages because of
irregular payment in the past, higher amount of debt compared to income level
or any other such factors.
According to the federal banking and thrift regulatory
agencies, subprime mortgages are those made to borrowers who display, among
other characteristics, (i) a previous record of delinquency, foreclosure or
bankruptcy, (ii) a low credit score, and/or (iii) a
ratio of debt service to income of 50 % or greater (Office of the Comptroller of
the Currency, et. al., 2007).
Subprime mortgages were mainly responsible for the increase
in demand for housing and home ownership rates in the US.
The overall US home ownership rate increased from 64% to 70%
from 1994 to 2004. This surging demand helped fuel housing prices
and consumer spending. Between 1997 and 2006, American home
prices increased by 124%. Partly, it was due to the encouragement by the
federal government for the consumption economy after the September
2001 disaster to boost domestic economy based on consumer spending. |
