Sub-Prime Rate

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Gurmeet Sukhija

Gurmeet Sukhija (Querist)
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16 October 2008 Dear experts

pls explain what is sub prime rate and how it affected the U.S economy....??

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S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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16 October 2008 Subprime lending (near-prime, non-prime, or second chance lending) is a financial term that was popularized by the media during the "credit crunch" of 2007 and involves financial institutions providing credit to borrowers deemed "subprime" (sometimes referred to as "under-banked"). Subprime borrowers have a heightened perceived risk of default, such as those who have a history of loan delinquency or default, those with a recorded bankruptcy, or those with limited debt experience. Although there is no standardized definition, in the US subprime loans are usually classified as those where the borrower has a credit score below a certain level, e.g. a FICO score below 660. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards.

Subprime could also refer to a security for which a return above the "prime" rate is received, also known as C-paper. In the United States, mortgage lending specifically, the term "subprime" can be applied to "non conforming" loans, those that do not meet Fannie Mae or Freddie Mac guidelines, generally due to one of an array of factors including the size of the loan, income to mortgage payment ratio or the quality of the documentation provided with the loan. The phrase also refers to bank loans taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and to certain types of self-employed persons.

Stemming from the "credit crunch", attention has been drawn to recent subprime lending practices. It has been suggested that some lenders engaged in predatory lending practices. More extreme allegations included lenders deliberately targeting borrowers who may not have fully understood the terms of their loan, or lending to people who were never likely to afford the interest payments in the long-run. Many of these loans included exorbitant fees and hidden terms and conditions, and they frequently led to default, seizure of collateral, and foreclosure. While often defended on the basis of lending to borrowers with compromised credit histories, the Wall Street Journal reported in 2006 that 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans.

Owing to the extent and the magnitude of the lending and credit crisis, which affected the greater financial markets during 2008, the controversy surrounding subprime lending has expanded.

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