Subprime Lending: the Rotten Core of the Current Economic Crisis

Subprime lending has triggered a global financial crisis, but it remains misunderstood. Here are some basic facts, culled from an upcoming report on abandoned housing by the Partnership for the Public Good. Subprime loans are high cost loans, ostensibly designed for people with less than “prime” credit. In reality, mortgage brokers and lenders often succeed in selling subprime loans to people with good credit. According to the Wall Street Journal, by 2006, fully 61% of subprime loans were going to people who qualified for conventional loans

Subprime Lending In the Primary and Secondary Mortgage Market

This article provides an exploratory analysis of the role of subprime lending through an examination of the spatial distribution of Federal Housing Administration (FHA)—eligible home purchase loans in the primary and secondary mortgage markets. Loan originations are aggregated to the metropolitan statistical area level to examine the proportion of the market served by FHA, prime, and subprime lenders. The article then examines whether subprime lenders hold their loans in portfolio or sell them to private conduits. Primary market results indicate that subprime lenders are more active in cities with worse economic risk characteristics. Secondary market results indicate that although subprime lenders sell most loans, they are more likely to hold loans in portfolio when economic risks are improving in historically high-risk locations. Finally, when more loans are originated in underserved census tracts, subprime lenders are much more likely to hold loans in portfolio

Policy and Practice Brief: Effect of Defaulted Student Loans on Return to Work Efforts

This brief describes types of student loans that exist and effects or defaulted student loans on individuals benefits. Reviewed are increased efforts to collect on defaulted student loans as well as remedies to take a loan out of default

Banking System, Real Estate Markets, and Nonperforming Loans

This paper examines the link between nonperforming loans, real estate prices, and the banking system. We found that the level of nonperforming loans affects bank profitability as well as the price performance of real estate markets. We also analyzed the factors that cause the ratio of nonperforming loans to total loans to fluctuate. We observed that a higher ratio of corporateloans to individual loans results in a lower percentage of nonperforming loans. In contrast, a lower real estate lending rate relative to the primary lending rate leads to a higher percentage of nonperforming loans. These results suggest that the percentage of nonperforming loans can be partially governed by the lending practices of banks.Nonperforming Loans, Real Estate, Banking System

Alternative Small Dollar Loans in Illinois: Creating sound financial products through regulation and innovation

Short term, small dollar loans are often a temporary necessity for many consumers trying to make ends meet. Unfortunately, the current market is primarily limited to payday loans. In Illinois, nearly 1.2 million payday loans were issued between 2006 and 2008.The mechanism for providing small dollar loans continues to be debated. Payday lenders claim that they provide a needed product and service to those underserved by other mainstream financial institutions. Consumer advocates, however, contend that payday loan products are predatory and should be regulated. Alternative small dollar loans products and other innovative mechanisms for meeting consumer demand must be explored. This brief provides an overview of the ASDL landscape in Illinois

The Case for More Debt: Expanding College Affordability By Expanding Income-Driven Repayment

Income-Driven Repayment (IDR) for federal student loans is rapidly becoming the primary tool that the federal government uses to provide progressive funding to individuals to pay for college. Under these programs, borrowers can choose to pay back their loans as a percentage of income, with eventual debt forgiveness after 10-25 years. If administered well, these programs can make student loans affordable for everyone, regardless of income. In this symposium essay, I argue that for IDR to meet its goal of providing affordable higher education to everyone, the federal government needs to raise the individual borrowing limits on Direct Loans and issue substantially more debt than it does today. This perhaps counterintuitive proposal—help students by increasing debt—follows from the observation that an IDR student loan is conceptually not at all like traditional debt and is more akin to a tax instrument. If a borrower promises only to pay a percentage of income, the nominal amount of the debt is not as crucial. Furthermore, if a student cannot cover net tuition with federal student loans, the student may be forced to use private loans or to work excessively, which can lead to worse outcomes

Price discrimination on syndicated loans and the number of lenders : empirical evidence from the sovereign debt syndication

Syndicated loans and the number of lending relationships have raised growing attention. All other terms being equal (e.g. seniority), syndicated loans provide larger payments (in basis points) to lenders funding larger amounts. The paper explores empirically the motivation for such a price discrimination on sovereign syndicated loans in the period 1990-1997. First evidence suggests larger premia are associated with renegotiation prospects. This is consistent with the hypothesis that price discrimination is aimed at reducing the number of lenders and thus the expected renegotiation costs. However, larger payment discrimination is also associated with more targeted market segments and with larger loans, thus minimising borrowing costs and/or attempting to widen the circle of lending relationships in order to successfully raise the requested amount. JEL Classification: F34, G21, G33 This version: June, 2002. Later version (october 2003) with the title: "Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans" : http://publikationen.ub.uni-frankfurt.de/volltexte/2005/992

Loans to Japanese borrowers

Though the Japanese banking system has been the focus of numerous empirical studies, there is scant empirical evidence on the characteristics of loan contracts between Japanese firms and their banks. This paper incorporates relatively new contract-specific data on bank loans to large borrowers to help fill this gap. Specifically, we examine how loans to Japanese companies compare with loans to similar non-Japanese companies and how loans to Japanese borrowers vary according to the nationality of the bank making the loan. We then gauge the value of bank loans to Japanese borrowers by estimating abnormal stock price returns around the announcement of new bank loans.

THE COST STRUCTURE OF MICROFINANCE INSTITUTIONS IN EASTERN EUROPE AND CENTRAL ASIA

Microfinance institutions are important, particularly in developing countries, because they expand the frontier of financial intermediation by providing loans to those traditionally excluded from formal financial markets. This paper presents the first systematic statistical examination of the performance of MFIs operating in Eastern Europe and Central Asia. A cost function is estimated for MFIs in the region from 1999-2004. First, the presence of subsidies is found to be associated with higher MFI costs. When output is measured as the number of loans made, we find that MFIs become more efficient over time and that MFIs involved in the provision of group loans and loans to women have lower costs. However, when output is measured as volume of loans rather than their number, this last finding is reversed. This may be due to the fact that such loans are smaller in size; thus for a given volume more loans must be made.http://deepblue.lib.umich.edu/bitstream/2027.42/40195/3/wp809.pd

Subprime and predatory lending in rural America: mortgage lending practices that can trap low-income rural people

This brief examines predatory mortgage loans and the harmful impact they have on rural homeowners and their communities. The report finds that minorities and low-income people are more likely to fall victim to higher-cost loans. The brief includes recommendations for policy changes at the state and federal levels, as well as advice on identifying and avoiding predatory loans