Most people commonly assert that the fallout of the housing and mortgage crisis only involves borrowers with shady credit who couldn't really afford a home in the first place. In reality, while this is true, there are plenty of other people with decent credit that are also stuck in the subprime mess. The Wall Street Journal analysis of over $2.5 trillion in subprime loans made since 2000, shows that as subprime loans grew increasingly popular, an escalating percentage of them went to people with credit scores that were high enough to qualify for conventional loans. And, according to the study, a significant number of borrowers with excellent credit signed up for subprime loans as well. The astoundingly large number of subprime loans among financially sound borrowers portraits just how far subprime mortgages have extended into the economy. Because major banks, mortgage companies, and investment firms, have been hit with billions of dollars in losses, remedial plans have been rolling out by everyone from congress and the Bush Administration to major financial institutions in hopes of stemming an even bigger meltdown throughout the year.  The extent to which subprime loans were made calls mortgage-lending practices into question. Many borrowers in good credit standing say they were pushed into these loans by aggressive marketing tactics by lenders who offered faster, easier approvals while downplaying higher reset interests rates and more stringent payment terms.
While there aren't concrete rules on what defines a subprime loan, they are generally riskier than traditional fixed mortgages and carry a low introductory rate that gets reset to a much higher interest rate several years later. Credit score are one key factor in determining what type of loan a borrower qualifies for. Credit scores can run anywhere from 300 to 850 with 620 being the median score. Those below the median score are typically unable to qualify for prime loans, while those above 620 usually qualify, unless they are seeking more money than they can afford. Because of rising home prices and the growth of lenders specializing in subprime loans, an increase in subprime loans for all types of reasons, including borrowers with good credit scores, was inevitable. Furthermore, many borrowers were expecting to refinance within a few years to avoid rate resets. But due to plummeting home prices and tight lending standards, refinancing has become improbable to many borrowers. Another study conducted between 2004 and 2005 by the Federal Trade Commission found that a large number of borrowers were confused by mortgage stipulations and didn't fully understand the terms of their mortgages. Many borrowers had loans with significant restrictions and harsh penalties they were not aware of when signing for the mortgage. However, lenders claim they aren't responsible for reckless borrowers who may have made poor real-estate investments with subprime terms. But the situation also indicates that many good credit borrowers are stuck with subprime loans whose costs will rise with scheduled resets, which could impair them financially and further weaken the U.S. economy. Delinquency rates for these loans are escalating because many of these loans included risky standards such as no documentation of the borrower's income or assets. Most subprime loans were made to first-time homebuyers or to investors who planned to quickly flip the homes. The analysis also concluded, "These loans suffered in many instances from poor lending decisions and misrepresentations by borrowers, brokers and other parties in the origination process." (Posted by K.Skowronski)
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