The end of the year is a time for looking back and reflecting on the past. Perhaps learning from it. With that in mind we poked around the NYT archive and found a great article on the subprime mortgage market and predatory lending from 2002.
THE subprime mortgage industry, which serves people with bad or blemished credit histories, has burgeoned in the economic boom of the last 10 years, allowing people previously deemed uncreditworthy to buy a home or to raise funds by refinancing their mortgage. But as the industry has expanded, so has its dark seam — predatory lending.
And as subprime loans have increased, so, too, have foreclosures.
Here’s how the March 24, 2002 Times explains the proliferation of subprime lending:
Whatever its degree, the proliferation of predatory lending is certainly the outgrowth of an explosion in the subprime market — distinct from the prime or conventional mortgage market, which serves buyers with satisfactory credit histories. And the subprime explosion since the early 1990′s has been fueled by both the booming economy and the creation of new tools that allow lenders — including Wall Street investors — to rapidly assess the risk posed by a whole new group of potential borrowers.
T HIS came about because of computerized credit scoring,” said Keith Gumbinger, a mortgage analyst and vice president at HSH Associates, a financial publishing company in Butler, N.J. Computerized scoring allows a would-be borrower’s credit history to be assigned a single number — between 300 and 900 — by which a lender or an investor in mortgage-market securities can determine how likely the applicant is to repay the loan.
”Borrowers can be placed anywhere along that scale,” Mr. Gumbinger said, ”and investors and lenders adjust their rates and fees to compensate for riskier borrowers.”
”It’s the big mortgage lenders who fund smaller lending firms and street-level mortgage brokers that pressed these subprime products and predatory products onto the market in order to serve new audiences and get more people to owe them money,” Mr. Gumbinger said. For a fee, packed into the loan, brokers bring borrowers and lenders together.
Ms. Ludwig agreed: ”It’s not just your rogue broker or lender on the street. This is very much built into the whole investment machinery so that even some of the large banking institutions, Wall Street investment houses and bond insurers have figured out a way to profit handily from this market segment.”
Lenders provide the capital and either hold the loan or, more commonly these days, sell it either to another financial institution that buys up bundles of loans or to Fannie Mae or Freddie Mac, the federally chartered corporations that buy first mortgages at discounts, insure and then resell them. ”Or it’s often securitized through the packaging of these loans, which are then sold through Wall Street investment houses,” Ms. Ludwig said, ”usually to institutional investors. Without the secondary market, without securitization, you wouldn’t have this proliferation of subprime and predatory lending.”
The article also concentrates on “predatory lending” techniques that probably seemed much more isolated than they really were. For example, one profiled consumer was told she was signing up for a 30-year fixed rate mortgage, only to find out that (you guessed it) she’d signed a ARM with a 1-year teaser rate of 5.5%.