A blast from the past from the Dallas Fed. This 1998 article from the Dallas Fed is full of fun little tidbits. But it’s a useful piece of history, as we think about the right way to regulate lending practices going forward.
In case you ever feel stupid for missing the massive crisis presented by subprime lending and the disconnect between risk and return that enabled it to flourish, just take a quick read through the Dallas Fed’s conclusion in 1998:
The use of modern marketing tools and celebrity spokespeople has contributed to increasing consumer awareness of subrpime mortgage lenders and their products. Subprime customers are neither limited to a single lender nor compelled to settle for the first lender that will provide credit. Increased visibility and competition have given the subprime borrower the option of shopping for a lower rate and receiving a higher level of customer service. These changes have allowed many subprime mortgage borrowers the opportunity to gain credit that might not have been available before the recent expansion of the subprime market, obtain a more competitive interest rate and improve their credit history by successfully meeting the terms of the loan.
In addition, technological advances have begun to provide lenders with automated underwriting and scoring tools that, although new to the subprime sector, may help in pricing loans and predicting defaults. These advances, combined with reactions to changes in economic conditions, may represent the beginning of a financial revolution that will create a much broader and more unified mortgage lending industry. In this respect, the subprime market provides another example of our free enterprise system’s “democracy of consumption” with respect to financial services as well as physical goods.
