January 04, 2019
What Does “Subprime” Mean?
If there is one negative phrase most closely associated with the so-called “Great Recession,” it must certainly be “subprime mortgages.” These instruments are blamed in shorthand for kicking off the precipitous decline of the large banks, resulting in every economic calamity that followed. But, despite the ubiquity of this phrase in news cycles from 2008-2012, we find that a remarkable number of people still aren’t really clear on what “subprime” refers to.
In short, it refers to one’s credit score. Generally, if a prospective borrower’s score sinks to (or remains at) 620 or below (a rubric that has, at various times, run from 600-640 as its lowest point), their credit is considered subprime. There are many reasons one might be subject to a subprime credit score, including:
- Bankruptcy or other legal judgments against a consumer ordering them to pay money to someone else.
- A large amount of household debt, wherein a borrower’s negative assets are such that there is little chance they might be able to afford their living expenses, the interest on a potential loan, and the principal on that potential loan.
- They lack the property or assets against which a lender could secure the loan—which means there is no property the lender could sell should the borrower default on the loan.
- A prior history of late payments of debts and/or payments missed.
- A lack of debt-payment history (which is common among young adults).
Sub-prime mortgages are troublesome because when a homeowner has trouble affording the monthly payment on their mortgage, it creates a great deal of stress for that homeowner on every level, sometimes resulting in foreclosure—which means a lost home, lost equity, and, for the lender’s part, the loss of stable income on the mortgage interest and whatever it costs to put the home on the market for re-sale. When a homeowner with a subprime credit score runs into economic distress, they are likely to quickly fall among the set of people least capable of paying their mortgage.
Prior to the “Great Recession” lenders were offered incentives to loan to borrowers with subprime credit scores, and also created their own incentives in the form of unregulated mortgage-backed securities packages. Generally, subprime loans have certain characteristics designed to ameliorate the lender’s overall risk—like higher interest rates, longer terms, and other terms considered less favorable to the borrower.
But nowadays it’s unlikely a lender will want to risk a mortgage with such a borrower at all.
As debt and default balloon, lenders lose money, foreclosures rack up, and bonds credit ratings fall—resulting in a snowball effect in the economy. That’s what happened in the Great Recession.
Lenders don’t intend to make a mistake of that scale again anytime soon.
We here at Topouzis & Associates, P.C. are experienced at title searches, and we are supported in supplying title insurance by numerous underwriters. Contact us if you’re getting into a new property—preferably backed with a solid credit score, if you are going through a lender—and we’ll put our vast experience to work for you, ensuring clear sailing through the closing process and beyond.