User:Wynler/Subprime

Racial divisions of subprime lending

Subprime (also sub-prime) popularly describes a general class of non prime financial lenders, financial products, or credit history. Typically, these products (e.g. loans, mortgages or credit cards) and lenders are for persons or businesses with blemished or limited credit histories or do not conform to acceptable industry prime standards based on risk and otherwise do not qualify for the prime rate products. These standards to other risks include but are not limited to; (LTV) loan to value ratios, (PTI) payment to income ratios, (DTI) debt to income ratios, net worth, or the type of collateral used if any. The consideration of what is not prime or subprime somewhat varies from financial institution to institution and is subjective in nature with the complexity of a diversified market place with different viewpoints and opinions.

The general classification of subprime or not prime derives from more specific categories of credit history or product portfolios created by financial institutions to compartmentalize the risk of default to be priced accordingly. Credit histories are usually classified into four sections (prime, near-prime, non-prime, and sub-prime) and financial product portfolios or paper are generally classified in correlating sections or tiers (A, B, C, and D) (A) being prime. Some financial institutions sub classified these tiers even further to include A+ A++ B- so on and so forth. In addition, financial institutions use these terms and classifications with many variations and substituting terms to describe their own portfolios, products, or credit qualifications. There is also no specific industry standard to differentiate between classifications and are not normally equally divided. These institutional classifications are used as a scale to price risk into financial products through interest rates and various bank fees. These rates and fees are priced respectively and determined as the perceived risk increases to become more subprime the price usually increases. You can compare the term subprime as a scale of risk between prime in relation to a debt. The more risk involved the more subprime a financial product becomes; the less risk involved the more prime it becomes. You can also compare the term subprime as a scale of risk in relation to credit history or credit score.

The term subprime became more popular and relevant during the credit crisis of 2007 and 2008 when higher risk adverse financial products, most notably home mortgages, began defaulting at a higher rate than expected and priced. It is debated that the cause of the surge in defaults was from the decline in risk management methods of loan originations or due to the economic pressures of oil and gasoline prices steadily increasing therefore reducing consumer disposable income and causing the effective cycle to recession.

See also

• Subprime Lending