Why Do People Turn Subprime?

The Economist:

WHO is a subprime borrower? You hear a lot of speculation about this small, but significant population. Were they greedy, irresponsible people who wanted a bigger house than they could afford? Or were they naive, seduced by unscrupulous lenders and the American dream of home ownership?

This Boston Fed paper (via Rortybomb) offers a precise definition of subprime borrower, which traditionally referred to a person with a low credit score. But the increase in subprime lending in the mid-1990s expanded the definition to someone who elects not to give detailed financial information, offers a low down payment, or wants a bigger house than a prime lender would grant them. In exchange for being subprime they paid higher interest rates.

One surprising thing about subprime borrowers is that up until the mid 2000s most loans were used to refinance rather than purchase a new home. So many subprime borrowers initially qualified for a prime loan, but then refinanced using subprime. This signals deeper financial issues with many subprime borrowers. It would take a significant shock to lower your credit score and make you refinance your mortgage at a higher rate. It suggests many subprime borrowers were struggling to stay in a home they already bought through a prime lender.