Subprime Lending/Foreclosure Crisis

Abstract

Subprime mortgage lending in the USA is marked by its short and costly history that ended with a foreclosure crisis in which several million borrowers lost their homes and trillions of dollars of household wealth. The advent of subprime lending in the early 1990s was initially understood as a product of innovations like risk-based pricing, automated underwriting, and credit scoring that would expand access to credit and homeownership. Designed to meet the needs of borrowers whose credit scores fell below a certain threshold, subprime loans featured a higher interest rate to compensate lenders for higher risk of default. As subprime lending grew, estimates of the fraction of subprime borrowers eligible for prime loans rose from 10 to 35 percent in the early