The drive to stretch traditional underwriting criteria is intensifying. Recently, there has been a boom in so-called "subprime" lending, offering a variety of types of mortgage and other loans to borrowers who have less than good credit; such lending is priced for risk and the favorable pricing of securities backed by subprime loans have found acceptance with investors...
Improved access to credit for consumers, and especially these more recent developments, reflects a good news/bad news story. The good news is that market specialization, competition, and innovation have vastly expanded credit availability to virtually all income classes. Access to credit is essential to help families purchase homes, deal with emergencies, and obtain goods and services that have become staples of our daily lives. Home ownership is at an all-time high, and the number of home mortgage loans to low- and moderate-income families has risen at a rapid rate over the last 5 years. Credit cards and installment loans are available to the vast majority of households.
The bad news is that under certain circumstances this may not be entirely good news, either for consumers in general or for lower-income communities. Along with unprecedented credit access, some problems are occurring that should alert us all to potential dangers. While every potential problem doesn't result in disaster, it's important to recognize the risks and take protective steps.
Some loans to low- and moderate-income families with multiple underwriting flexibilities, layered subsidies, and high loan-to-value ratios have been showing unfavorable delinquency and default trends. Large mortgage lenders, secondary market agencies, and private mortgage insurers are conducting studies of their portfolios to determine how more-relaxed underwriting standards are affecting delinquencies and defaults. Although more study is required to determine which risk factors are most important in particular lending situations, the results of these portfolio studies bear watching.
Although legitimate lenders may be able to manage the risks associated with the overall expansion of lending, the same may not be true of many consumers, especially those with limited means to weather a storm or who have been encouraged to borrow improvidently. Should economic or personal difficulties occur, such as the temporary loss of a job, illness, or unexpected car or house repairs, those with limited incomes and without significant savings may easily find themselves in financial trouble.