What Exactly Are Subprime Loans?
First, what is a subprime loan? Wikipedia defines subprime debt as loans to borrowers “who do not qualify for the best market interest rates because of deficient credit history”. Why would a lender ever want to lend to such a cad? The answer is simple, When real estate is hot, it doesn’t matter if the borrower gets behind on payments. Why? Since the house is appreciating, the borrowers can simply borrow more by refinancing or getting a second mortgage (even with a record of late payments), OR, the borrowers can sell it very quickly and the lender will get paid off then. Even if the borrower becomes unable to physically refinance or sell (serious accident, drug problem, deceased with no heirs, etc) and the property goes to foreclosure sale (extremely rare in good markets), investors swarm over the foreclosure sales like sharks in a feeding frenzy to buy the property and the lender gets paid in full. …this is why 2005 saw one of the lowest foreclosure rates in history for California …Aft
