The Subprime Lending Fiasco

The Subprime mortgage Fiasco has it roots as far back as 2005. Just to recap, subprime loans are for consumers that don't meet the standards or qualifications of Fannie Mae or Freddie Mac.
Now these requirements, if not met, are primarily due to a number of factors including this first item which is an individuals credit. If someone has had some late payments, say 30 or 60 days past due within the last 12 months that could disqualify you from meeting the standards and
guidelines. Maybe the credit file is not deep enough in other words that individual has not been a member of the credit bureau for very long.

Creditors would love to see someone have credit, with a number of creditors, on file for say 10, 15 or even 20 years with payments being
made on time. This type of file is viewed by creditors as a predictor of future paying habits. Lenders also look at the individuals income. Perhaps the individual is not making a sufficent amount of money or maybe a large portion of that income is derived from commission, which we all know is not guaranteed. Job history is another consideration. Lenders like to see stability within your employment. If you have had 3 or 4 jobs within the last two years they will question that and probably consider you not credit worthy. Basically they want to know that you will still be employed for some time to come after they extend you a loan. (good luck in this economy).

Lenders also want to consider the ratio of debt to income or income to mortgage payment ratio. All of these factors lead to a less than stellar loan applicant if there is a lack of stability with any of these items and it pushes consumers into the dreaded subprime lending zone, where rates are higher to offset the risk mortgage lenders assume. In order to increase earnings through loan receivables lenders were focusing their attention on how to make loans to those individuals instead of looking at the objective aforementioned criteria, thus subprime lending.

The adjustable rate mortgages along with subprime lending began to experience defaults. This was a double negative because the subprime customers were already high risk so it was inevitable that they were going to default. We saw the same thing with the ARM, (adjustable rate mortggages) customers because they took on loans they should not have with the idea that they would be able to refinance at a later date.

Once the ARM rates reset consumers could not afford their homes because the payments increased, depending on the situation, by $500, $700 or even $1,000. This quickly lead to defaults and an increase in foreclosures, which lead to a steady decline in home prices thus taking the
ability from customers to refinance because of declining equity.

Banks because of the astronomical losses were less likely to make any new loans, and they even shut down consumer home equity loans, which caused a further decline in economy activity. This credit freeze was a result of banks not wanting to deplete the reserves they are required to keep on hand to offset the losses.

If consumers cannot receive credit from banks for car loans, purchase of homes and any other retail activity, then we are faced with a situation in which economy activity is furthered curtailed because two thirds of economy activity comes from consumers. Small businesses are also subject to the credit crunch which further exasperates the problem. All this leads to further unemployment.


Now we are looking at a $700 billion dollar bailout which is not likely to work because of how wide spread the problem is.The bailout is supposed to syphon off the bad mortgages and credit card accounts from lenders which would allow them to start lending again and ease the credit crunch and thereby stimulate the economy. Just recently the bailout agreement was approved --- and then it ran into some snags so now it's up in the air, but it would appear that the powers that be are still trying to get it all worked out.


There are hundreds of banks which are on the bubble and stand a very good chance of failing in the very near future. No one is really saying how wide spread this problem is at the very least the bailout will be like bailing water out of the Titanic with a bucket.

Just don't look for this problem to end any time soon. More industrys will be affected. It's almost like a trickle down effect.

To Your Great Success



Mel