Subprime lending is when credit is given to people who are a higher risk. This is also known as "B/C" or "nonconforming" credit. Loans to people with bad credit help people who may not have gotten enough help from other lenders in the past. Subprime mortgage lending has grown a lot in the last few years, and more than 90% of all subprime mortgage loans were made in or after 1993. By the end of 1996, the total value of subprime mortgage loans that were still being paid was more than $350 billion. In 1997 alone, subprime lenders made home equity loans worth more than $125 billion. Subprime loans have become a big part of the home equity market, and that part is growing. In 1996, subprime loans made up 11.5 percent of the total market for home equity loans. By the first half of 1997, they made up 15.5 percent of this market. At the same time, the companies that work in the subprime market are changing over time. One of the most important changes in this market is the rise of subprime mortgage lending by big companies that do business all over the country.
The subprime mortgage market has grown because these loans have been profitable, the number of people who want them has gone up, and there are more opportunities on the secondary market. Most of the time, lenders charge higher interest rates and fees on subprime loans than they do on regular loans. When there is a higher credit risk, like with many subprime loans, it can make sense to have higher rates and points. Critics, on the other hand, say that some subprime lenders charge too high of interest rates and fees to cover the higher risks, especially since these loans are backed by the value of a home. Some people say that the 1980 federal deregulation of certain state interest rate caps is partly to blame for the high rates that lenders charge on first mortgages.
In a time when interest rates are generally low, the relatively high profit margins in the subprime mortgage industry have fueled demand in the secondary market from investors looking for securitized assets with higher yields. In 1996, the subprime mortgage sector issued more than $38 billion in securities. This was the biggest increase in securitizations of any lending industry sector that year. In turn, the growth of the secondary market has helped to keep the industry growing by letting lenders raise money on the open market to expand their subprime lending. Freddie Mac, one of the main government-backed companies that buys mortgages, recently announced plans to get into the secondary market for subprime loans by buying a lot of "A minus" loans by 1998 and "B and C" loans, which are riskier, by 1999.
Expect the market for subprime loans to keep growing. The number of people who don't pay their credit card bills on time is going up, and the number of personal bankruptcies is at a record high. Both of these things hurt borrowers' credit histories and push more people into higher risk categories. In the meantime, consumer spending is still strong. All of these things make the market for subprime loans bigger. Also, because of a change in the tax code that only lets people deduct interest on their first mortgage, more people may be looking for home equity loans.
