Subprime Loans And Risky Borrowers: A Recipe For Disaster

Alternative lending has been a saving grace for many borrowers that had nowhere else to turn when the credit market dried up in the wake of the 2008 housing bubble collapse. For borrowers, alternative finance became the only option when banks tightened lending standards.

But have alternatives simply moved subprime risk to a new conduit? Let’s dig into the question.

Subprime loans and risky borrowers: A recipe for disaster

During the housing bubble, the number of subprime mortgage loans being originated in the U.S. exploded. Many loans were made to risky borrowers with FICO scores below 620, while “Alt-A” loans — those made to borrowers with good credit scores but poor employment history — also ballooned. Often, these loans had unfavorable terms, like 2/28 hybrid mortgages, which have low fixed interest rates for two years before costs increase dramatically.

The stats are staggering. The subprime mortgage loan market grew from $65 billion in 1995 to $625 billion by 2005. As of March 2008, the subprime market was estimated to be 11.8% of the total mortgage loan market — a recipe for disaster.

The bubble had to burst

When the mortgage bubble burst, many of the world’s largest lenders found…

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