what is subprime mortgages

I saw an article on the BBC today talking about the loses banks have suffered with the subprime stuff, here is a table. I didn't realise it was so many billions

MAIN SUB-PRIME LOSSES SO FAR

Citigroup: $18bn
UBS: $13.5bn
Morgan Stanley $9.4bn
Merrill Lynch: $8bn
HSBC: $3.4bn
Bear Stearns: $3.2bn
Deutsche Bank: $3.2bn
Bank of America: $3bn
Barclays: $2.6bn
Royal Bank of Scotland: $2.6bn
Freddie Mac: $2bn
Credit Suisse: $1bn
Wachovia: $1.1bn
IKB: $2.6bn
Paribas: $439m
Source: Company reports

From what I know its basically a loan given to people who can’t really afford it. So usually banks loan you dosh based on 4 times your wages, subprimes give you more than that. If the interest rates go up the people are in big trouble. I think also the deal only pays off the interest (e.g. like interest only mortgages) so at the end of the mortgage you would still owe the lump sum, although in thirty years it probably would be that much. The other hazy fact I know is that I don’t think you have to go through the same checks as you would if you went to the back, so credit rating and all that stuff doesn’t matter because they will basically lend to people the banks won’t touch. All this gives you a recipe for lots of people defaulting on the mortgage.

I have found a couple of proper definitions

http://www.mtgprofessor.com/A%20-%20Type%20of%20Loan%20Provider/what_is_a_sub-prime_lender.html

A sub-prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders. Some are independent, but increasingly they are affiliates of mainstream lenders operating under different names.

here is wikipedia definition

Subprime lending (also known as B-paper, near-prime, or second chance lending) is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. The phrase also refers to banknotes taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and certain types of self-employed individuals.

Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. The term "subprime" refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself.

Subprime lending is highly controversial. Opponents have alleged that the subprime lending companies engage in predatory lending practices such as deliberately lending to borrowers who could never meet the terms of their loans, thus leading to default, seizure of collateral, and foreclosure. There have also been charges of mortgage discrimination on the basis of race.[1] Proponents of the subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.[2]

The controversy surrounding subprime lending has expanded as the result of an ongoing lending and credit crisis both in the subprime industry, and in the greater financial markets which began in the United States. This phenomenon has been described as a financial contagion which has led to a restriction on the availability of credit in world financial markets. Hundreds of thousands of borrowers have been forced to default and several major American subprime lenders have filed for bankruptcy.


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