Refinancing Mortgages

Subprime lending (also known as B-paper, near-prime, or second chance lending) is lending at a higher rate than the prime rate.
Refinance Car Loan
While often defined or defended as lending to borrowers with compromised credit histories, the Wall Street Journal reported in 2006, 61% of all borrowers receiving subprime loans had credit scores high enough to qualify for prime conventional loans.[1]A subprime loan is offered at a rate higher than A-paper loans due to the perceived increased risk. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards. The most abusive subprime lending practices are, arguably, short-term “payday” loans.
Home Loan Refinancing
Subprime lending is highly controversial. [2] Proponents of subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.[3]
Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.[4]
Fannie Mae has lending guidelines for what it considers to be “prime” borrowers on conforming mortgage loans – those loans they will buy or securitize into the credit market.
[edit] Subprime lenders
Equity Loan
Subprime loans are considered to carry a far greater risk for the lender due to the aforementioned credit risk characteristics of the typical subprime borrower. In the case of many subprime loans, this risk is offset with a higher interest rate or various credit enhancements such as Private Mortgage Insurance (PMI). In the case of subprime credit cards, a subprime customer may be charged higher late fees, higher over limit fees, yearly fees, or up front fees for the card.
[edit] Borrower profiles
Subprime can offer an opportunity for borrowers with an allegedly less than ideal credit record to gain access to credit.
[edit] Private Label Credit
Subprime Origination, Securitization and Servicing
Some subprime originators (mortgage companies or brokers) sell high-risk residential or commercial loans with a variety of gimmicks that can trap low income borrowers into loans with increasing yield terms that eventually exceed borrower’s capability to make the payments.
Subprime mortgages
Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender.
Subprime mortgages totaled $600 billion in 2006, accounting for about one-fifth of the U.S. home loan market[2].
There are many different kinds of subprime mortgages, including:
interest-only mortgages, which allow borrowers to pay only interest for a period of time (typically 5–10 years);
Subprime credit cards
Credit card companies in the United States began offering subprime credit cards to borrowers with low credit scores and a history of defaults or bankruptcy in the 1990s when usury laws were relaxed. These cards usually begin with low credit limits and usually carry extremely high fees and interest rates as high as 30% or more.[6]In 2007, many new subprime credit cards began to sprout forth in the market. In a very limited number of situations, subprime credit cards may help a consumer improve poor credit scores. Lenders use the higher interest rate and fees to offset these anticipated higher costs.
The same goes for loans. Allegedly less creditworthy subprime borrowers represent a riskier investment, so lenders will charge them a higher interest rate than they would charge a prime borrower for the same loan.
To avoid the initial hit of higher mortgage payments, most subprime borrowers take out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. Most subprime ARM loans are tied to LIBOR (London Interbank Offered Rate – a rate trading system originating in Britain).
Mortgage discrimination
Main article: Mortgage discrimination
[2] Black and other minorities disproportionately fall into the category of “subprime borrowers” because of lower credit scores, higher debt-to-income ratios, and higher combined loan to value ratios. Because they are higher risk borrowers, they are more likely to seek subprime mortgages with higher interest rates than their white counterparts.[8]
U.S. subprime mortgage crisis
Main article: 2007 Subprime mortgage financial crisis
A steep rise in the rate of subprime mortgage defaults and foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation’s second biggest subprime lender.[10][13] Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the underlying loans. In late March of 2008, Friedman Billings Ramsey [5] reported the default rate on securitized subprime loans hit 25.2% in December of 2007. Alt-A loan defaults also increased to 8.65%.