• Subprime lending became an "economy killer."sign here please image by jodi mcgee from Fotolia.com
  
  During the subprime mortgage lending era, from the early 2000s until the housing bubble burst in 2006, credit guidelines were looser than what conventional and government lending guidelines usually allowed. Some lenders even allowed for no documentation of income. To offset the credit risks involved in lending money to subprime (not highly creditworthy) borrowers, lenders commanded higher interest rates or loans that would adjust upward over time. Some had prepayment penalties that prohibited the owner from refinancing out of a bad loan. Overall, subprime lending was responsible for an economic catastrophe that hurt millions of people.
  
  

Mortgage Payment Increases

• Subprime loans typically were offered to the borrower as an adjustable-rate mortgage. Some had a frozen period and would adjust upward after a period of time. The payments would continue to adjust upward until the homeowner could no longer afford to make them. If the lender would not work with the borrower to help get the payment down to something he could afford, he would often walk away from the home and let it go into foreclosure. The subprime borrower's credit status thus suffered even more, and the lender was hurt since it had to take a huge loss when foreclosing on the property.
  
  

Low Appraisals

• When the adjustable rates and payments increased to the point where the subprime loan borrower allowed the home to go into foreclosure, the bank's resale of the foreclosed home would usually be at a reduced price. When this happens, the lowered sale price hurts the market value of other homes in the area. While other homeowners in the neighborhood are fighting to keep their house values high, a lower resale price brings down overall property values, especially when many foreclosures occur in the same area.
  
  

Non-Insured Loans

• Federal Housing Authority loans have always required mortgage insurance, which is usually financed with the loan. The purpose of the mortgage insurance premium is to repay the lender's losses if the borrower defaults on the loan and the lender forecloses on the property. This safety feature was not a part of subprime loans, since most did not require mortgage insurance. As a result, lenders had nowhere to go to recover their losses after a foreclosure involving a subprime loan.
  
  

Lender Closings

• With so many foreclosures of homes, many banks could not handle the financial overload and closed their doors. This in turn caused many people to lose their jobs and find themselves unable to make their monthly mortgage payments. Many lost their homes as the economy went into a deep recession. As this downhill spiral continued, the building of new homes dropped drastically. Today, subprime loans have been discontinued, and the remaining lenders take a much more conservative approach to offering mortgages.