en.wikipedia.org/wiki/Subprime_lending
Please improve this article by removing excessive or inappropriate external links. subprime lending (also known as B-paper, near-prime, non-prime, or second chance lending) generally refers to lending at a higher expectation of risk than that of A-paper, and generally accompanied by higher interest rates.
A subprime loan may have less room for financial difficulties of the borrower, which can lead to late payments and defaults. Stemming from the credit crunch, attention has been drawn to recent subprime lending practices.
More extreme allegations include deliberately targeting borrowers who could not understand what they were signing or lending to people who could never meet the terms of their loans.
edit Subprime lenders To access this increasing market, lenders often take on risks associated with lending to people with poor credit ratings or limited credit histories. Subprime loans are considered to carry a far greater risk for the lender due to the aforementioned credit risk characteristics of the typical subprime borrower.
credit cards, a subprime customer may be charged higher late fees, higher over-the-limit fees, yearly fees, or up-front fees for the card. Late fees are charged to the account, which may drive the customer over their credit limit, resulting in over-the-limit fees. These higher fees compensate the lender for the increased costs associated with servicing and collecting such accounts, as well as for the higher default rate.
edit Borrower profiles Subprime loans can offer an opportunity for borrowers with a less-than-ideal credit record to become a home owner. Borrowers may use this credit to purchase homes, or in the case of a cash-out refinance, finance other forms of spending such as purchasing a car, paying for living expenses, remodeling a home, or even paying down on a high interest credit card. However, due to the risk profile of the subprime borrower, this access to credit comes at the price of higher interest rates, increased fees and other increased costs. Subprime lending (and mortgages in particular) provide a method of "credit repair"; if borrowers maintain a good payment record, they should be able to refinance back onto mainstream rates after a period of time.
United Kingdom, most subprime mortgages have a two or three-year tie-in, and borrowers may face additional charges for replacing their mortgages before the tie-in has expired. Generally, the credit profile keeping a borrower out of a prime loan may include one or more of the following: * Two or more loan payments paid past 30 days due in the last 12 months, or one or more loan payments paid past 90 days due the last 36 months;
Old Navy, and most furniture and appliance retailers), most national retail chains use some form of subprime lending as a marketing strategy. Deferred interest programming may result in high default rates that must be offset by aggressive lending practices.
edit Origination, securitization and servicing Some subprime originators (mortgage companies or brokers) formerly promoted residential loans with features that could trap low income borrowers into loans with increasing yield terms that eventually exceed borrower's capability to make the payments.
Servicing Rights" of the REMIC trusts from Trustees who, depending on the terms of the Pooling and Servicing Agreement (PSA), have the authority to replace Servicers.
Servicing Rights" of the REMIC trusts in hopes of successful foreclosures and equity stripping from Borrowers, Guarantors, Loan Sellers and Investors. REMIC Trusts are "Passive" or "Pass-Through" Entities under the IRS code and are not taxed at trust level. However, the bond-holders are expected to be taxpaying entities and are taxed on interest income distributed by the REMIC trusts.
mortgages are defined by the financial and credit profile of the consumers to which they are marketed. According to the US Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies.
debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history.
credit scores below 620580 on a scale that ranges from 300 to 850. Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender. Although most home loans do not fall into this category, subprime mortgages proliferated in the early part of the 21st Century.
interest-only payments, which allow borrowers to pay only interest for a period of time (typically 5-10 years); This last class of mortgages has grown particularly popular among subprime lenders since the 1990s. Common subprime hybrids include the "2-28 loan", which offers a low initial interest rate that stays fixed for two years after which the loan resets to a higher adjustable rate for the remaining life of the loan, in this case 28 years.
edit Subprime credit cards Credit card companies in the United States began offering subprime credit cards to borrowers with low credit scores and a history of defaults or bankruptcy in the 1990s when usury laws were relaxed.
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. In 2007, many new subprime credit cards began to sprout forth in the market. As more vendors emerged, the market became more competitive, forcing issuers to make the cards more attractive to consumers.
In some situations, subprime credit cards may help a consumer improve poor credit scores. Most subprime cards report to major credit reporting agencies such as TransUnion and Equifax, but in the case of "secured" cards, credit scoring often reflects the nature of the card being reported and may or may not consider it. Issuers of these cards claim that consumers who pay their bills on time should see positive reporting to these agencies within 90 days.
edit Proponents Individuals who have experienced severe financial problems are usually labeled as higher risk and therefore have greater difficulty obtaining credit, especially for large purchases such as automobiles or real estate. These individuals may have had job loss, previous debt or marital problems, or unexpected medical issues, usually unforeseen and causing major financial setbacks. As a result, late payments, charge-offs, repossessions and even bankruptcy or foreclosures may result. Due to these previous credit problems, these individuals may also be precluded from obtaining any type of conventional loan. To meet this demand, lenders have seen that a tiered pricing arrangement, one which allows these individuals to receive loans but pay a higher interest rate and higher fees, may allow loans which otherwise would not occur. From a servicing standpoint, these loans have a statistically higher rate of default and are more likely to experience repossessions and charge offs. Lenders use the higher interest rate and fees to offset these anticipated higher costs. Provided that a consumer enters into this arrangement with the understanding that they are higher risk, and must make diligent efforts to pay, these loans do indeed serve those who would otherwise be underserved. Continuing the example of an auto loan, the consumer must purchase an automobile which is well within their means, and carries a payment well within their budgets.
which are backed by the full faith and credit of the issuing country or institution. Allegedly less creditworthy subprime borrowers represent a riskier investment, so lenders will charge them a higher interest rate than they would charge a prime borrower for the same loan.
adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these ...
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