Precursor, "Subprime I"
Although most references to the Subprime Mortgage Crisis refer to events and conditions that led to the financial crisis and subsequent recession that began in 2008, a much smaller bubble and collapse occurred in the mid- to late-1990s, sometimes dubbed "Subprime I". It ended in 1999 when the rate of subprime mortgage securitization dropped from 55.1% in 1998 to 37.4% in 1999. In the two years following the 1998 Russian financial crisis, "eight of the top ten" subprime lenders "declared bankruptcy, ceased operations, or sold out to stronger firms."
The crisis is said to have had "had all the earmarks of a classic bubble" with enthusiasm over rising stock prices replacing caution over shoddy business practices and concern over whether the earnings of the companies were sustainable. Loans were made to borrowers who were unable to pay them back. The subprime mortgage companies began taking unexpected write-downs as mortgages were refinanced at lower interest rates. Much of the reported profits turned out to be illusory and companies such as Famco went under. Along with the bankruptcies came a wave of lawsuits and complaints from consumer advocates, who accused the subprime industry of engaging in predatory lending. The impact was slight compared to the later bubble.
Subprime I was smaller in size — in the mid-1990s $30 billion of mortgages constituted "a big year" for subprime lending, by 2005 there were $625 billion in subprime mortgage loans, $507 billion of which were in mortgage backed securities — and was essentially "really high rates for borrowers with bad credit". Mortgages were mostly fixed-rate, still required borrowers to prove they could pay by documenting income, etc. By 2006, 75% of subprime loans were some form of floating-rate, usually fixed for the first two years."
Read more about this topic: Subprime Crisis Background Information