Banks Look to Resume Risky Subprime Lending

Banks Look to Resume Risky Subprime Lending

Failed subprime mortgages played an enormous role in the 2008 financial meltdown. Loans were made to borrowers using lax lending and many creative loans were made to people who arguably should not have qualified in the first place.

As the crisis unfolded, many borrowers were unable to convert their high interest mortgages to standard mortgages further deepening the catastrophe. It now appears that some big banks are ready to start lending to subprime borrowers again. As MSBNC reports:

In the depths of the financial crisis, borrowers with tarnished credit like Ms. Alejandro were almost entirely shut out by traditional lenders. It was hard enough for people with stellar credit to get loans.

But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

The fact that banks are now looking at subprime lending again should not be a surprise to anyone. As late as 2010, FICO reported that 25.5% of Americans had credit scores below 599. That translates into about 43 million people who fall into the subprime category.

This is an increasingly important segment of the lending market.It should come as no surprise that banks lending in the subprime space are going to penalize borrowers with higher interest rates and less agreeable terms. MSNBC tried to make these practices seem predatory and cast the banks as robber-barons. In actuality, it is simply standard risk management.

With federal regulators aggressively auditing bank’s loan portfolios, banks are going to manage their risk much more carefully to avoid the dangerous lending practices that led to the financial crisis. From an economic standpoint, it is good to see banks willing to responsibly lend into this space again. An economic recovery with banks unable or unwilling to lend is much less likely.