A Subprime Mortgage Primer For Bank Customers
What is a subprime mortgage?
A subprime mortgage is a mortgage product developed to assist borrowers with a
less than perfect credit history. “Subprime” does not refer to the interest rate, but
rather to the quality of the borrower’s credit. Subprime loans, in fact, carry rates
that are higher than overall market rates.
While many different types of lenders make mortgage loans, most subprime
lending is done outside of the banking industry and is often done by mortgage
brokers and mortgage companies that may not be subject to the same scrutiny
as federally-insured banks and savings institutions.
Why are subprime mortgages in the news?
There are many factors. First, the once “hot” housing market has taken a
dramatic turn. Second, several national subprime lending companies have failed
this year due to a dramatic increase in late payments and foreclosures among
their borrowers. This in turn has led to fears of major losses for investors and
concerns that a “credit crunch” will make it harder for consumers and businesses
to borrow for mortgages as well as other purchases.
To some extent, the nation’s federally insured banks and savings institutions
have been the victims of mistaken identity in the subprime mortgage debacle.
Much of the media coverage refers to subprime lenders in a general sense. But
federally-insured commercial and savings banks in fact have made very few
subprime loans and most local community banks have made none at all.
Could my bank be affected by the current subprime loan problems?
Non-bank mortgage competitors that have played fast and loose with the rules
have given the entire financial industry a black eye. But by and large, the loan
portfolios at federally-insured banks and savings institutions are mostly
unaffected by the current subprime mortgage mess.
Federally insured banks and savings institutions are very sound today and will be
able to weather this downturn, although man