Back in 2007, “subprime” became a dirty word. In the years leading up to the recession,
lenders became increasingly aggressive in their lending guidelines in the
pursuit of a greater market share of a very profitable business. Looking back it is obvious that subprime
lending had gotten out of control like an alcoholic at an open bar. There was no chance that the evening
would end well.
But should subprime be forever banned from the housing
finance market? Of course not. Even the alcoholic can be fun to have at a
party as long as we don’t let him drink anything stronger than ginger ale. There is a need for sober subprime lending in
the housing market. In fact, some
responsible subprime lending has already returned. Wisely, no one actually refers to it as
“subprime,” since to many people that is still a dirty word.
There are mortgage products available today to homeowners with less than perfect credit, but they require strong income documentation and a sizable down payment. As more private capital
becomes confident in the mortgage market, we will see an expansion of
responsible subprime lending. But let's promise to keep it under control.
