There’s Subprime and There’s Subprime

Subprime is the top villain in most explanations of the Great Real Estate Bubble but not all subprime mortgages were created equal.

On one extreme, you have borrowers with;

• slightly low credit scores
• good income
• good down payment amounts
• who get 30-year fixed rate mortgages

These are called subprime mortgages but they will probably not default much more often than prime mortgages.

On the other extreme, you have borrowers with;

• very low credit scores
• not enough income for the size of the mortgage (often no doc loans)
• who put no money down
• who get interest-only or option ARMs
• and who qualified using the 2-year teaser monthly payment

These are also called subprime mortgages but they’re incredibly more likely to default.

As the Great Real Estate Boom progressed, not only did the number of subprime mortgages increase dramatically but the toxicity of some subprime mortgages also increased dramatically.