Freddie Mac, a government-sponsored mortgage-loan buyer, estimated that borrowers of 15 to 35 percent of all subprime loans it bought in 2005 could have qualified for prime-rate loans. Fannie Mae, another government-sponsored loan buyer, estimated up to 50 percent of the borrowers, whose subprimes it bought that year, had credit profiles that could have qualified them for prime rates.50 percent? 50 percent? HW readers know about the pressure lenders put on their appraisers to close loans, but I don't think many outside the industry have heard about the pressure put on closers to maximize yield at every opportunity. And when subprime was booming, baby, there was no better way than to pump more volume into the machine. I don't know how rampant this practice might have been -- the Fannie and Freddie numbers suggest it was (is?) very prevalent -- but I do know the incentives were there. After all, if the borrower, of their own free (albeit uninformed) will, was willing to sign on for a loan that made investors and the lender more money, why not, right? Hopefully you sense the sarcasm here.
Prime Becomes Subprime
CNNMoney has an interesting article tackling what I suspect most of us knew was going on at some level during the boom -- borrowers were given subprime product when they could have qualified for a prime loan. The numbers, however, are just jaw-dropping: