What Isaac Newton knew about

This is an extract from a BloodhoundBlog post by Chicago-area Mortgage Planner Dan Green:

I recently wrote about sub-prime loans for the first time in a long while because the sector should start taking more headlines in the papers.

I'd hate for you to be unready for it, of course.  Sub-prime loans are a big part of mortgage lending.

"Sub-prime" is a broad-sweeping term for the large percentage of loans that won't get bought by the quasi-government agencies Fannie Mae and Freddie Mac.  The opposite of "sub-prime" is "conforming", as in: these loans conform to the guidelines set forth by Fannie Mae and Freddie Mac to be eligible for purchase.

Typically, the credit profile of a sub-prime borrower includes one or more of the following characteristics:

• Low credit scores


• History of derogatory credit (i.e. bankruptcy, foreclosure)


• Currently delinquent on their home loan


• Lack of credit history or credit depth


• Low asset levels


• Low income levels or non-verifiable income levels


• High loan-to-value combined with low income versus debt


• Contains "random" circumstance that introduces risk

Just because a person exhibits one or more of these traits, however, doesn't mean that he is automatically a sub-prime borrower.  This set of guidelines is very general.

Even though "sub-prime" has negative connotation to it, sub-prime loans serve a very important purpose.  Sub-prime loans provide home financing to people who otherwise would not be approved for a loan at all.  Remember: they don't conform to the government guidelines! 

Recently, sub-prime lenders have fallen into a world of hurt because the default risk that is inherent in every sub-prime loan is being realized with alarming frequency.  Lest you think these defaults are surprising the markets, this is a problem two years in the making and industry insiders know it.

-- Dan Green, BloodhoundBlog

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