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Prime, Subprime, Deep Subprime, Suprime-Like . . . and hold it, my fav "Aspiring Prime"

posted by Katie Porter

What's in a name? A lot of heartache, potentially, as Johnny Cash explained in A Boy Named Sue.

The consumer finance industry is awash in labels for lending. Despite the lack of data, and clear analysis, that left certain people (apparently nearly all of Wall Street) surprised about the housing crisis, the lending industry is still defining success for itself. Shutterstock_268949369Kevin Wack at American Banker examines the "slippery" definition of subprime, giving examples of Equifax recalibrating the "subprime" and "deep subprime" labels to different places on the credit score range. The result: instantly, the percentage of subprime auto loan originations falls from 36% to 28%.

Labels themselves do not predict default risk (we hope the actual underwriting, including credit score, does that work). But labels do matter. Consistent use of terms such as "prime" and "subprime" help government and researchers study trends and make consistent, reliable determinations about markets. They make sure that various regulators are looking at similar loans, and they help the public evaluate their credit standing.

Maybe this is a project for the Financial Stability Oversight Council, which devoted one-page to consumer protection in its 100-page 2015 report. In what I take as a sign that FSOC should tackle this issue, there is even a heading on "Data Gaps."

Comments

KT,

I think I may be able to help here, that is reduce to a least common denominator.

In 1996 when my woes with Bank of America commenced, I was shocked and amazed to learn that bac was selling 94% of all initiated mortgages to FNMA alone. So I think it is safe to say that the myriad of labels you describe would fall into the 6% of the remaining mortgages.

Although there is a degree of truth in blaming the meltdown on the adjective "subprime" and its various labels,I believe that blaming subprime distorts history as to placing blame.

I for one suggest ignoring the 6% and focus on the real number for concern, ie the 94%. It is the failure of the "GSE Business Model" that caused the meltdown.

assuming you really did want to link to the johnny cash video, this'll do it:
https://www.youtube.com/watch?v=WOHPuY88Ry4

RJS: I had the correct link--the exact one you sent--but our blogging software doesn't like You Tube links apparently. Thanks for the helpful effort.

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