EC223 Lecture Notes - Lecture 8: Subprime Lending, Fico, The Conference Board
Document Summary
Now let"s talk about the steps leading to the financial crisis in greater detail. Financial liberalization and innovation in the mortgage markets. Each of the terms in the chart above summarizes the initial stages of the crisis. First of all, advances in computer technology called data mining made it possible for banks to give out residential mortgages to customers with high credit risk (no income, no job, and no assets). Subprime lending is the practice of extending credit to borrowers with certain credit characteristics. Fico (fair isaac corporation) score of less than 620 would disqualify borrowers from receiving loans at the prime rate hence the term subprime (wikinvest, 2012). With subprime lending, banks went on a lending spree contributing to what is known as a credit boom. This practice contributed to an increased moral hazard, that is, banks engaged in riskier loans than they otherwise would have. That is, the government ensured banks that they would be protected from losses.
