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Mon Dec 17th 09:56 AM | Rating: 0 0
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Fannie Mae: Beyond Economical Repair?

"Subprime" has two meanings. It technically means loans to people with extremely low credit scores (i.e. subprime *borrowers*), which doesn't include Alt-A loans, interest-only, "liar loans", 100% financing, etc. When you see claims that "subprime" is only a few percent of total loans, this is what they're talking about.

Casually, people usually mean the *loan* is not a prime loan. If you consider that a "prime" *loan* means a loan at a fair rate to a borrower with good credit, able to comfortably make the payments and with a respectable down payment, then "subprime" is a huge category (including Alt-A and much, much more), and almost all recent loans in the bubble areas.

The problem is that all of the second category is at risk in the current housing downturn. Nobody cares what the mortgage industry's technical definition of "subprime" is, we care about what loans may lose money for institutions like Fannie Mae. It would take a miracle to save an institution like Fannie Mae with a 1.5% capital ratio with house prices forecast to fall 10% by the Case-Shiller housing futures index.
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