FEDERAL RESERVE BANK OF ST. LOUIS REVIEW
The Evolution of the Subprime Mortgage Market
Souphala Chomsisengphet and Anthony Pennington-Cross
Of course, this expanded access comes with
a price: At its simplest, subprime lending can be
described as high-cost lending.
Borrower cost associated with subprime
lending is driven primarily by two factors: credit
history and down payment requirements. This
contrasts with the prime market, where borrower
cost is primarily driven by the down payment
alone, given that minimum credit history require-
ments are satisfied.
Because of its complicated nature, subprime
lending is simultaneously viewed as having great
promise and great peril. The promise of subprime
lending is that it can provide the opportunity for
homeownership to those who were either subject
to discrimination or could not qualify for a mort-
gage in the past.1 In fact, subprime lending is most
INTRODUCTION AND MOTIVATION
H omeownership is one of the primary
ways that households can build wealth.
In fact, in 1995, the typical household
held no corporate equity (Tracy, Schneider, and
Chan, 1999), implying that most households find
it difficult to invest in anything but their home.
Because homeownership is such a significant
economic factor, a great deal of attention is paid
to the mortgage market.
Subprime lending is a relatively new and
rapidly growing segment of the mortgage market
that expands the pool of credit to borrowers who,
for a variety of reasons, would otherwise be denied
credit. For instance, those potential borrowers who
would fail credit history requirements in the stan-
dard (prime) mortgage market have greater access
to credit in the subprime market. Two of the major
benefits of this type of lending, then, are the
increased numbers of homeowners and the oppor-
tunity for these homeowners to create wealth.
This paper describes subprime lending in the mortgage market and how it has evolved through
time. Subprime lending has introduced a substantial amount of risk-based pricin