subprime is the rate you pay if you are percieved not to be a good risk, and is an interest rate that is typically higher than what the average consumer pays.
Also, don't higher interest rates drive down the cost of housing. Perhaps a good thing for some who wish to enter into the market as new home owners.
BTW, thanks for straightening that out for me.
Well, the point (for the lender) is not so much earning a higher rate on his loan, which as you suggest is fine; but having a borrower default and for the lender to suddenly discover the collateral underlying the loan is impaired, eg; not of the value stated in the appraisal process.
Obviously, the higher rates charged for these flavor loans are to offset higher risks of defaults. But the rub here is that not only have those defaults occurred at higher-than-expected rates, but now the lender cannot make him/herself whole by foreclosing on the home.
I am working on a home right now that was sold for $571K early this year. (A solid $60K of that was mortgage fraud, and/but that’s another chapter to the story) This home was financed with a first mortgage of about $435K and a second loan (’piggyback”) of about $135K. In the six months this homeowner has taken to discover that her gross takehome pay of just under $3K couldn’t quite be stretched to cover a $4.5 monthly nut, the property has declined maybe $60K in value. Current home value $450-$460K and the market is very slow. The second mort holder in this case will be lucky getting a dime on the dollar and could well be entirely wiped.