What is Subprime?

“Subprime” borrowers are those who pose a greater risk of payment default than prime borrowers. According to the United States Department of Treasury guidelines issued in 2001, “[s]ubprime borrowers typically have weakened credit histories [and] . . . may also display reduced repayment capacity.”

Many of the loans made to subprime borrowers were so-called “stated income” or “no documentation” loans. These did not require borrowers to show evidence of their income, but merely required a verbal verification of how much they made. Nevertheless, pursuant to their own guidelines, originating banks were still required to verify that a borrower’s stated income was reasonable and in line with his or her occupation and years of experience. Evidence that these guidelines, as well as many other guidelines and reps and warranties of the major lenders, were ignored has led to a flurry of litigation by insurers and investors to force lenders to repurchase defective mortgages at par.

Evidence has also emerged (including, for example, inPeople v. Countrywide, et al., Case No. LC081846, which was filed in Los Angeles County Circuit Court and settled as part of the Countrywide Stipulated Judgment) that mortgage brokers and originators often encouraged borrowers who could otherwise qualify for lower rates or reduced fees to apply for stated income loans because they carried a higher resale value and thus generated higher fees for the brokers.

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