Walter E. Williams

A subprime lender is one who makes loans to borrowers who do not qualify for loans from mainstream lenders. It's a market that has evolved to permit borrowers with poor credit history and an unstable financial situation the opportunity to get home mortgages. The catch is they pay a higher and typically an adjustable rate mortgage (ARM). Encouraged by the housing bubble, easy credit, along with the expectation that housing prices would continue to appreciate, many subprime borrowers took out mortgages they could not afford in the long run, particularly if interest rates rose and housing prices depreciated.

As with most economic problems, we find the hand of government. The Community Reinvestment Act of 1977, whose provisions were strengthened during the Clinton administration, is a federal law that mandates lenders to offer credit throughout their entire market and discourages them from restricting their credit services to high-income markets, a practice known as redlining. In other words, the Community Reinvestment Act encourages banks and thrifts to make loans to riskier customers.

According to an article in The Atlanta Journal-Constitution (11/04/07) titled "Black Atlantans often snared by subprime loans," by Carrie Teegardin, a national study of credit scores, not just mortgage loan applicants, found that 52 percent of blacks have credit scores that would classify them as subprime borrowers compared with 16 percent of whites.

Many lenders did make loans to people who had no realistic ability to pay them back. But that doesn't qualify as fraud, although there might have been a bit of exuberance in the repackaging of the mortgages into securities and selling them to investors. Some argue that many borrowers defrauded the banks by misrepresenting their income, the so-called "no doc" loans or "liar's loans".

Walter E. Williams

Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of 'Race and Economics: How Much Can Be Blamed on Discrimination?' and 'Up from the Projects: An Autobiography.'
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