What do they mean when they write “sub-prime” borougher?
Is anyone that does not meet these traditional metrics considered a sub-prime borougher?
Or is there some “new and improved” underwriting standard?
I’ve heard a number of different explanations about what a sub-prime borougher is. I’ve heard things like FICO scores below 600 or below 500. Or boroughers with a history for bankruptcy. I’ve heard boroughers that qualify on stated income.
I am just curious because it seems that this definition is key for estimating how deep the housing correction will be. If the definition hinges on the traditional underwriting standards, then there is a whole lot more correcting in the future.
Answers:
Sub-prime can be defined several ways. It can be a score below 625, a person with a prior bankruptcy, collections, foreclosures, judgments, tax liens, child support, repossessions or late payments on credit cards or installment loans.
It can also be simply a higher LTV (loan to value) because someone is upside down on their trade in. (Auto loans).
Most prime banks will only loan up to 125% of N.A.D.A. trade-in value, while sub-prime banks will loan up to 145%/150% of N.A.D.A. trade-in value.
The corrections needed in the houseing market are going to be massive in my opinion due to the lenders making loans that they should not have.
Before the crash a subprime lender for 100% financing needed at least a 580 FICO score in most places the reasoning being that housing prices where advancing in the double digit range and that would cover any loss. SOme took that lucrative market even farther with lower FICO scores. This was done by requiring a higher interest rate, but with rates artificially low and again house prices rising faster than incomes it was affordable, that is until the housing market burst. Interest rate went up for buyers that where barely affording what they have, and with no equity suddenly they owe more that the house is worth and at the same time cannot make the payments. This whole thing was caused by speculators and mortgage companies out to make a killing, thinking that This was sustainable. When prices for necessities go up in double digit figures per year, yet wages are basically stagnant at 2-3% rise, there reaches a point where as one can no longer aford the necessities.
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