Glossary: Savings And Loan Crisis – Subprime Lending

Savings & Loan Crisis – the failure of over one thousand savings and loan institutions from 1985-1991 described as, “the largest and costliest venture in public misfeasance, malfeasance and larceny of all time.” The ultimate cost of the crisis is estimated to have totalled around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government. This unforeseen expense was the primary reason for the large federal budget deficits of the early 1990s.

Some commentators say that this bailout was a factor in the generous subprime lending of 2005-2007. Lenders ignored the risks because they were sure the government would bail them out if the inevitable happened. While it is impossible to say that lenders purposefully made plans with a government bailout in mind, that is certainly what ended up happening. The Federal Reserve lowered interest rates on January 22nd 2008 to 3½ percent to try and keep the mortgage market from crashing completely.

Seasoned Loan – a loan that has been on the books for a year or more that displays a solid payment record by the borrower. The first year is typically the most volatile in a mortgage and the risk of defaulting decreases substantially if good credit is maintained during this time.

Second Chance Loan – another term for a subprime loan. The name refers to that fact that people have suffered a financial setback (divorce, job loss) after years of good credit are given another chance at getting a mortgage.

Secured Debt – a type of debt that is the result of money loaned on collateral, which might come in the form of the home or other valuable possessions. If the borrower neglects to pay off according to the terms agreed, the lender can acquire that collateral from the borrower.

Securitized Debt – debt (usually from a mortgage) that is sold to a third party so that the company doing the selling (usually the mortgage company) can claim the cash flow up front. This is completely legal and very common (see Freddie Mac and Fannie Mae). The purchasing company also assumes responsibility for collecting the debt and keeps the repayments. This burden was what caused international companies such as HSBC, Northern Rock, Citibank and Deutsche Bank to post such high losses when the mortgage market collapse hit.

Settlement Fees – a collective term for all the fees paid when buying a house or refinancing aside from the actual value of the property. This includes but is not limited to fees paid to the mortgage broker, the lender, the state, and any lawyers involved in the transaction.

Short Sale – sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. The terms for this are negotiated between the lender and the borrower.

Subprime Lending – the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants. A subprime loan is offered at a rate higher than prime loans due to the increased risk.

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