Subprime mortgage
서브프라임 모기지
A home mortgage lent at high interest to people whose poor credit records or uncertain incomes make it hard to obtain an ordinary (prime) loan. It grew rapidly in the United States in the mid-2000s, was packaged into securities and sold around the world, and its mass default from 2007 became the starting point of the 2008 global financial crisis.
In depth
When a bank lends, it weighs whether the borrower can repay on time. People with a record of missed payments, little property to pledge or an income too small to cover living costs and interest are classed as "subprime", below the prime grade. Subprime loans carry higher interest rates and less favourable terms to compensate for that risk. Supporters said they opened home ownership to the young, to people facing discrimination and to people without savings for a down payment.
In the 2000s US subprime mortgage lending exploded, growing from 5 percent of all mortgage originations ($35 billion) in 1994 to 20 percent ($600 billion) in 2006. As long as house prices kept rising, a borrower who could not pay could sell or refinance at a higher value, so lending standards collapsed quickly. They went from loans that accepted a stated income in place of proof to so-called NINJA ("no income, no assets") loans that checked only a credit score. Adjustable-rate loans that charged a low "teaser" rate for the first two or three years and then jumped were common: about a third of the adjustable-rate mortgages written in 2004–06 had teaser rates below 4 percent, and monthly payments could double or triple when the teaser period ended.
Lenders could make such risky loans freely because they did not keep them but sold them to investment banks. The banks bundled thousands of loans into mortgage-backed securities (MBS), sliced these again by grade and sold them as collateralised debt obligations (CDOs). With high ratings from the credit rating agencies, the risk of subprime lending spread to pension funds, European banks and investors in Asia.
When house prices turned in 2006 and teaser periods ended, delinquencies poured in. In April 2007 New Century Financial, the second-largest subprime lender, filed for bankruptcy, and as the value of securities built on these loans collapsed, the institutions holding them were shaken one after another. Subprime mortgages were one corner of the American housing market, but through securitisation, derivatives and a financial system swollen with debt they spread into the 2008 global financial crisis. Korean media commonly called the first stage of the crisis the "subprime mortgage crisis".