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

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

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

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

9. Subprime Lending
Subprime Credit Card
Subprime Mortgage

10. 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.

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

12. 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.

13. 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.

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

15. 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.

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