13% of outstanding mortgages now “subprime.”

“Subprime” loans are made to borrowers whose credit scores are low, or whose income is not high enough for the amount being borrowed. The rates are higher than those given to “prime” borrowers. Right now, for example, prime rate on a 30-year fixed rate mortgage is about 6.35%. Subprime rates range from somewhere above 7% to 10% or more.

So, subprime lenders have less ability to pay but have to pay more than others for the same amount of money. Not a good combination.

That’s why it is upsetting to see that the incidence of these mortgages has risen sharply over the last few years. Only 2% of outstanding mortgages were subprime as little as seven years ago. Today it is 13%.

One reason these loans have increased so much is that lenders have been much more willing to make them. Indeed, some have resorted to unscrupulous (and often fradulent) techniques to write subprime loans.

Ameriquest, for example, has agreed to pay $425 million to settle charges that it did things like inflating appraisals, hiding fees and encouraging applicants to provide inflated income figures or inaccurate employment information.

Subprime loans are far more likely to default, and if house prices have gone down, lenders will be unable to recoup the full amount of their mortgage when they foreclose and sell the house. This leaves an unpaid balance, which the borrower is still liable to pay. It’s a mess.

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