subprime loan

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Subprime Loan

A loan that is made at a higher interest rate than most other loans. Subprime loans are made to borrowers who do not qualify for ordinary loans because of bad credit history or some other reason. There is a higher risk of default on subprime loans. Their prevalence was a significant factor in the 2008 credit crunch. See also: Subprime Mortgage.

Subprime loan.

Lenders may make subprime loans to borrowers who would not ordinarily qualify for credit if customary underwriting standards were applied. To offset the increased risk that these borrowers might default, lenders charge higher interest rates than they offer to creditworthy borrowers and assess additional fees.

While subprime rates vary from lender to lender, the Federal Reserve defines a subprime loan as one that carries an interest rate at least three percentage points higher than the rate on a US Treasury bond that has the same term as the loan.

Subprime loans may provide credit to responsible people who may not have a strong credit history. However, subprime lending practices can be abusive or predatory, trapping unsophisticated borrowers in a cycle of debt while providing initially large profits for the lender.

Lenders with large portfolios of these loans are vulnerable to major losses in market downturns.

Subprime loans can be securitized and sold to investors as pass-through securities or in more complex packages such as collateralized debt obligations (CDOs). Individual and institutional buyers purchase these products for the promise of higher than average returns despite the greater risk of default.

subprime loan

A loan at higher interest rates because the borrower does not qualify,for credit or income reasons,for the best rates.

References in periodicals archive ?
While total mortgage originations have continued to flatten, the subprime risk tier saw modest origination growth of 3.4% year-over-year, representing the largest volume of subprime loans originated in the second quarter post-recession.
Edinburgh-based RBS committed a variety of ills associated with the underwriting and packaging of subprime loans into securities that became toxic in the US housing bust, US officials said.
Fay was servicing more than 53,000 loans totaling $11.2 billion, including more than 37,000 subprime loans totaling $7.3 billion.
Delinquent subprime loans are nearing crisis levels at auto-finance companies in the US, according to Bloomberg.
The surge in housing values in the United States in the early 2000s--and the resulting bust that started in late 2006--exposed two distinct problems with subprime loans. Firstly, with the securitization of mortgages, these higher-risk loans/mortgages were bundled together and given higher-than-appropriate Triple A credit ratings.
But in 2003, subprime loans began to take off, and FHA lending began to decline.
In particular, predatory lending practices in the form of subprime loans increased the risk of foreclosure: "Increasing 'predatory' lending practices in recent years have lead to the abnormal increase of foreclosures.
The automakers' financing arms account for most of the increase in subprime loans.
Auto Business News-August 5, 2014--General Motors investigated over subprime loans
Wealthier minorities are more likely to receive subprime loans than affluent whites, according to a New York University study of the Home Mortgage Disclosure Act.
Experian found that credit continues to loosen on originations with subprime loans up 11% on new vehicles and 3.6% on used.
Fannie Mae and Freddie Maccould be close to a settlement with the Securities and Exchange Commission, the New York Times reported, over whether the companies adequately disclosed their exposure to risky subprime loans. Under the proposed agreement, there would be no monetary penalty or admission of fraud.