This term dates back to the 1920s and is originally and mainly American. It appears first in the obvious sense of something, often food, that is below the highest quality or grade, inferior. By the 1970s it had begun to be linked with finance, at first in the sense of a commercial lending rate lower than the prime rate, one that was typically offered only to the most desirable borrowers. At that time to be offered a subprime loan was a mark of your creditworthiness and financial stability, ironic in view of what happened later.
The word began its slide into notoriety in the early 1990s. It started to mean a loan, often on unfavourable terms, to borrowers who didn’t qualify because of a poor credit history or other circumstances — those who in plain language would be called bad risks, who had court judgements against them, who had financial problems due to redundancy or divorce, or who were simply poor. Though subprime could be used for borrowing money for any purpose, the most significant use has been for mortgages.
There have always been firms who were prepared to lend money to people in these groups, at a price, but in the nineties established lenders moved into this market. A surprisingly large number of euphemisms were coined, including sub-standard, impaired credit, B-paper, non-conforming, near-prime, and second chance, but subprime has become the most common.
Lenders wanting to offset the risks of such loans began to package them into complex and ingenious financial instruments which they sold on to banks and hedge funds, who were keen to acquire them. Unfortunately, the rising levels of mortgage foreclosures in the US during 2006 and 2007 has left many of these instruments valueless and created a worldwide crisis in banking.
Shares in Bradford & Bingley today tumbled 13% after it admitted to larger-than-expected losses from investments on the subprime mortgage market.
Evening Standard, 13 Feb. 2008
Immortalized as the practice of making loans to borrowers with deficient credit histories, subprime lending has led to more than 100 major mortgage lenders closing their doors.
La Prensa (San Diego), 16 Nov. 2007
Page created 4 Apr. 1998
Last updated 16 Feb. 2008
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