The Wall Street Journal analyzed more than $2.5 trillion in subprime loans made since 2000 and found that as the number of subprime loans grew, the loans were being issued to borrowers with better and better credit scores—borrowers who could have qualified for traditional loans with more reasonable terms.
In fact, the WSJ says that at the peak of the subprime boom in 2005 over half of the subprime loans went to people with good credit.
By 2006, 61% of subprime loans were going to people with good or even excellent credit scores.
The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy — including middle-class and wealthy communities where they once were scarce. They also affirm that thousands of borrowers took out loans — perhaps foolishly — with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.
The analysis also raises pointed questions about the practices of major mortgage lenders. Many borrowers whose credit scores might have qualified them for more conventional loans say they were pushed into risky subprime loans. They say lenders or brokers aggressively marketed the loans, offering easier and faster approvals — and playing down or hiding the onerous price paid over the long haul in higher interest rates or stricter repayment terms.
As we’ve previously learned, subprime mortgages were more profitable than traditional “conforming” loans and were easily repackaged and sold on the secondary market. Consequently, compensation structures were set up that encouraged mortgage brokers to bring in these types of loans.
So why did the borrowers fall for it?
Many borrowers figured they would refinance in a few years before the rate on their loan moved higher — but falling home prices and tighter credit standards in the past year have suddenly made that unrealistic in many cases. “Brokers and agents were telling” borrowers with high credit scores for the past several years “that it was OK” to get subprime loans, “and borrowers were wanting to take on more debt,” says Mark Carrington, director, analytical sales and support at First American LoanPerformance.