Subprime

More than half of foreclosed loans are the result of subprime and predatory lending. A subprime borrower is one with bad credit. Each lender has its own definition of what constitutes a subprime borrower, but typically a FICA credit score of less than 620 places you in that category.

Federal regulations have essentially outlawed loans that are made only on the basis of stated income. Loans are much difficult to get and are made only to those home buyers who demonstrate an ability to repay.

Many lenders specialized in subprime loans and were eager to loan money to those with bad credit. Higher risks bring higher rewards. Loans to subprime lenders commanded higher interest rates.

The argument in favor of subprime loans was these loans enabled a segment of the populations to buy homes that would otherwise be unaffordable.

Unfortunately, because of low teaser payments, subprime loans enabled subprime borrowers to buy homes that are actually unaffordable.

There was no point in enabling someone to buy a house only to take it away a few years later (except to allow the lenders to make a quick profit).