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In 2008, David Goldstein and Kevin G. Hall reported that more than 84% of the subprime mortgages came from private lending institutions in 2006, and the share of subprime loans insured by Fannie Mae and Freddie Mac decreased as the bubble got bigger (from a high of insuring 48% to insuring 24% of all subprime loans in 2006). [266]
Subprime mortgages — also known as non-prime mortgages — are for borrowers with lower credit scores, typically below 600, that prevent them from being approved for conventional loans.
The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, [18] with over 7.5 million first-lien subprime mortgages outstanding. [19] Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. [20]
Private lenders pushed subprime mortgages to capitalize on this, aided by greater market power for mortgage originators and less market power for mortgage securitizers. [21] Subprime mortgages amounted to $35 billion (5% of total originations) in 1994, [ 140 ] 9% in 1996, [ 141 ] $160 billion (13%) in 1999, [ 140 ] and $600 billion (20%) in 2006.
One study, by a legal firm which counsels financial services entities on Community Reinvestment Act compliance, found that CRA-covered institutions were less likely to make subprime loans (only 20–25% of all subprime loans), and when they did the interest rates were lower. The banks were half as likely to resell the loans to other parties. [114]
The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers. [5] As people become economically active, records are created relating to their borrowing, earning, and lending histories.
The United States Housing and Economic Recovery Act of 2008 (commonly referred to as HERA) was designed primarily to address the subprime mortgage crisis.It authorized the Federal Housing Administration to guarantee up to $300 billion in new 30-year fixed rate mortgages for subprime borrowers if lenders wrote down principal loan balances to 90 percent of current appraisal value.
Subprime and Alt-A loans account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006. [ 76 ] In April 2007, financial problems similar to the subprime mortgages began to appear with Alt-A loans made to homeowners who were thought to be less risky. [ 76 ]