Yonsei GSIS Bae, Deuk Han Subprime Lending Yonsei GSIS Bae, Deuk Han

Credit Classification Prime Loan Alternative-A Loan (Alt-A Loan) Subprime Loan

Credit Classification Prime loan: The borrower has strong employment and credit histories, income sufficient to pay the loan obligation without compromising the borrower’s creditworthiness, and substantial equity in the underlying property.

Credit Classification 2. Alternative-A loan (Alt-A loan) : These loans are considered to be prime loans but they have some attributes that either increase their credit riskiness or cause them to be difficult to categorize and evaluate.

Credit Classification 3. Subprime loan: A subprime loan is the extension of credit to a person with a damaged credit history who is considered to be a high risk borrower. Subprime loans have higher than average interest rates. Subprime lenders reduce their risk in making loans by charging borrowers a higher interest rate and sometimes additional fees.

Credit Scores (Fico Scores) A credit score is a numerical grade of the credit history of the borrower. Although the credit scores have different underlying methodologies, the scores generically are referred to as FICO scores. Fico scores range : 350 ~ 850 The higher the score, the lower the credit risk.

Subprime Lending FICO Score below 660 A lending for the borrowers who have credit reports associated with higher default rates including limited debt experience, excessive debt, a history of missed payments, failures to pay debts, and recorded bankruptcies.

Subprime Lending Subprime lenders Take a far greater risk = Subprime borrowers Pay much higher interest

Subprime Lending Subprime Credit Card Subprime Mortgage

Subprime Credit Cards Subprime credit cards begin with low credit limits and carry extremely high fees and interest rates as high as 30% or more. In 2002, as economic growth in the United States slowed, the default rates for subprime credit card holders increased dramatically, and many subprime credit card issuers were forced to scale back or cease operations.

Subprime Mortgage Mortgage: A pledge of property to secure payment of a debt. Typically, property refers to real estate.

Subprime Mortgage Traditionally, banks have financed their mortgage lending through the deposits they receive from their customers. Banks have moved to a new model where they sell on the mortgages to the bond markets.

The Rise of the Mortgage Market The private sector has dramatically expanded its role in the mortgage bond market, which had previously been dominated by government-sponsored agencies like Freddie Mac. Subprime mortgages increased 292%, from 2003 to 2007.

Subprime Mortgage New model has led to abuses as banks no longer have the incentive to check carefully the mortgages they issue.

The Housing Price Crash The wave of default on mortgage is having a dramatic effect on house prices, reversing the housing boom of the last few years and causing the first national decline in house prices since the 1930s.

Question What was emotion of the financial market that increased subprime lending? Greed