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