About a decade ago, the severe housing crisis during Lehman Brothers’ collapse left countless Americans in financial straits.
The 2008 subprime mortgage crisis was the result of major policy failures by the Federal Reserve. Banks lent excessively at low profits, and when they decided that enough was not enough, they soured thousands of mortgages.
The credit scores of subprime borrowers are lower and they may have multiple negative items on their credit reports, such as delinquencies and account rejections, which makes them higher credit risks for lenders.
Moreover, subprime borrowers’ credit histories might also show little activity, meaning that lenders are not able to make credit decisions based on their credit histories.
As applied to mortgages in the United States, the term “subprime” generally refers to loans aimed at borrowers with poor credit ratings or low-income levels who may find it difficult to obtain financing through traditional sources. As compared to Prime and Alt-A borrowers, subprime borrowers are perceived to have the highest default risk.