To date, the face of the subprime borrower as portrayed in the media was nearly always the urban low income borrower who was just trying to live the American dream, was the victim of an unscrupulous borrower, good people facing a few economic shocks, didn’t realize how high their payment would be when their ARM reset, etc. However, a recent WSJ study illustrates how subprime loans crossed all socioeconomic levels, geographic regions, ethnic lines, etc. In fact, there were even high concentrations of subprime loans in affluent areas with high housing appreciation rates; areas that now lead the nation in foreclosures.
At first glance, one might think that if affluent to high income people were taking out subprime loans, that it must mean that these people had bad credit, financial struggles, etc. The truth is that many affluent buyers used subprime loans to purchase more home then they could afford with a prime loan, make speculative real estate “investments” and/or to withdraw more equity from their home than they could with a prime HELOC. In short, a lot of the subprime problem comes from people whose greed (or hubris) caused them to make bad financial decisions, instead of just buying a smaller house with a sensible prime loan, not withdrawing all of their home equity, not engaging in irresponsible speculation, etc.
In other words, the subprime problem wasn’t just concentrated amongst low income buyers with bad credit that weren’t financially savvy enough to know what they’re getting into; a lot of affluent, prime borrowers gambled with subprime loans and are now losing their shirts. Subprime loans weren’t just mortgages with high interest rates originated to people with bad credit, they were also high cost loans originated to affluent people with good credit, who were looking to borrow more money than sensible lending standards would allow.
