Can anyone tell me why lenders started making more and more subprime loans to homebuyers?

Question

15 years ago in the mortgage business, there was no such thing as a subprime loan.
8 years ago, it was a rarity....but something has happened in the last several years.
Sure we can blame the lenders, and sure we can blame the borrowers, but what are the greater market forces and events causing lenders to have to drop their guidelines to get borrowers or borrowers to not being able to meet the higher guidelines of yore?

Answer 1

What happened basically was because of assuming that a trend was permanent. In the financial world, this is a form of mental disorder. Trends are why anyone could be a day-trader and make money, for a while. Their impermanence is why anyone that didn't get out of that in time lost their shirts.

The subprime loans were designed to "churn" the loans. You had loans that were fixed for usually two years, then would become variable. The whole intent was for the borrower to refinance in two years, again generating all of the bank's new-loan fees. The trend for real estate to appreciate rapidly was counted on to continue to keep this attractive for the borrower. Borrow 100 with 5k in costs to pay off a loan of 95, wait two years, borrow 105k with 5k in costs to pay off a loan of 100, wait two years, borrow 110k with 5k in costs to pay off a loan of 105...... but then the trend didn't cooperate by giving a home value of 110k, and the balloon broke. People still had the same house they did, but now a loan for more than they originally paid for it, and they can't get refinancing, and can't sell it for what they owe.

Trends are temporary. People that think otherwise will eventually lose money.

Now, how do you know when a trend is coming to an end? There's a story about the Crash of '29 about a broker who was getting a shoe shine, and the shoe shiner gave him a hot tip on a stock. He realized that when shoe shine boys were giving stock tips, the market was about to crash and he got out. During the day-trader era, there were stories about bus drivers and janitors making huge money in day-trading, just before that went south. How many times have YOU seen people offering to help people get loans in their answers right here on Yahoo, offers totally unconnected to the question being asked?

It was a trend. Now it's not.

Answer 2

In most cases..I wouldn't blame the borrower. The real estate market has gone mad the past 10 years.. average homes values have gone from $100k to $300k. The average person wants to own a home.. and are pressured to get in while the price is almost realistic. The lenders used to require blood and your first child to get qualified, but have relaxed so much..in some cases people are getting homes without inspections. At the same time, mortgage companies have become a dime a dozen trying to make a quick buck off anyone that walks in their door. They local mortgage companies are, in some cases, fudging the applicants application so they qualify from the lender.. its very easy.
The only person that would benefit from an interest only, adjustable mortgage is the lender.. they shouldn't be legal.

Answer 3

govt lowered interest rates, making it easy for lenders to dish out easy subprime loans. They figured they'd get their nice commission, then turn around and sell the loan on the secondary mortgage market, so they wouldn't have to deal with the fallout when it all came crashing down, as it is now. And the govt gets the credit for what appeared to be a good economy, but in reality was yet another bubble.

Answer 4

Ever sense the Federal Reserve took over on Dec. 23, 1913
which is not either federal or a reserve it is the BANKING industry have we had so much trouble.

The banks and their policies and the way they do their underhanded business is the fault that we see today . They play a game of foreclosure (that they don't have to do) and auction the properties and reclaim to resell. They collect both ways. It is the banks that rule this country not the government.

You didn't see the Feds come to the aid of the people in foreclosure but they jumped in and gave double digit billions when the Stock Market took a dive.

Want to read about the Federal Reserve?
Go to: www.apfn.com You will become enlightened.

Answer 5

Greed on both sides. There was a prolonged boom in the housing market. Home values were going up at a rapid rate, so the risk was lower. Buy a house for $100,000 and the value increases to $125,000 and you are willing to take on the risk. The banks are more willing to lend as their collateral keeps going up in value. Lend $100,000 and in two years you have $125,000 in value securing the loan.

The boom ended, as they always do. The high inflation is never sustainable. So you owe $100,000 on a house worth $95,000 and you cannot re-finance to get rid of the ARM when the rates go up, as they always do.

Answer 6

Greed. It is that simple. Real estate kept going up in vlaue, so the lenders figured there was no risk to 100% loans and the like.

Answer 7

Blame congress. The Democrats felt that homeloans were unfair to women and minorities because of the high standards. So they changed the rules and created the "subprime" market. Now about 25% of these loans are bad and they are "looking" for the culprit. It was them!!! LOL!!!

Answer 8

Eventually these lenders will go belly up and rely on their insurance companies to bail them out. It's gonna' get worse!

Answer 9

I read in a real estate article that mortgage brokers made a bigger commission on sub-prime loans. So they began to push them. All of a sudden every ones a mortgage broker, smooth talking scum. They made bank and should be punished.