| Another factor in the development of subprime lending | | | | available. And real estate looked like a great way to |
| as it is today was the gradual deregulation of banks | | | | get rich quickly. Any good-sized social gathering was |
| from the mid-1970s to the mid-1980s. Deregulation | | | | likely to have one or two new real estate agents in it. |
| meant that banks could open branches much more | | | | There was an astounding variety of seminars and |
| freely, but it also meant that interest rates went | | | | courses on making money by selling real estate. |
| sky-high. At one point, average rate of interest was | | | | And of course, as always happens, it changed. |
| more than 10%. The housing market began to slow, | | | | Investments that had seemed secure were not; people |
| since the interest rate meant that many potential home | | | | were losing money. There were new regulations to |
| buyers were no longer within reach of owning their | | | | help us through the real estate crash. Then the wave |
| own homes. It was about this time that the subprime | | | | crested once again: house prices were going up, the |
| adjustable rate mortgage (ARM) came onto the | | | | market was stabilizing, and here we were in a real |
| American scene. | | | | estate boom! This time, however, potential |
| A borrower who chose an ARM would probably have | | | | homeowners who previously would have been |
| sufficient qualifications for the lower rate. As well, | | | | ineligible for loans were able to borrow large amounts |
| private mortgage insurance (PMI) was being offered to | | | | of money. Underwriting requirements by lenders |
| buyers so that lenders would be protected if the buyer | | | | slipped; you could borrow money at non-banking |
| defaulted. PMI offset the potential loss to lenders if the | | | | institutions as easily as at a bank. Verifying the income |
| borrower could not repay the loan, and the lender | | | | of a borrower became less of an issue as lenders |
| could not recover his expenses after foreclosure on | | | | hurried to make as many deals as possible with |
| the house and sale of the property. If you really | | | | borrowers. |
| wanted to buy a house, they were available, but at a | | | | That is a brief outline of subprime lending. The face it |
| cost. Some bankers got the message that they could | | | | has worn for the past decade, and is still wearing |
| raise interest rates even higher, increase closing costs | | | | today, is very different from the way it looked back in |
| and fees, and make an excellent profit from people | | | | the 1980s, in the deregulation days. Maybe we ought to |
| who were probably not going to be able to repay their | | | | consider the idea of turning back to the way we used |
| loans - if they just assumed more risk. | | | | to handle loans. What we're doing now doesn't seem |
| Banking deregulation meant that new branch banks | | | | to be helping anyone very much - except perhaps the |
| were on every corner. Money for loans was readily | | | | subprime lenders. |