The Bad Guys of Subprime Lending Are Raking in Bailout Billions

By John Dunbar and David Donald, The Center for Public Integrity. Posted May 20, 2009.

The following report is part of a larger study by the Center for Public Integrity on the roots of the financial meltdown. The list of the top 25 lenders responsible for nearly $1 trillion of subprime loans, according to a Center for Public Integrity analysis of 7.2 million “high interest” loans made from 2005 through 2007 is at the bottom of this article.

The top subprime lenders whose loans are largely blamed for triggering the global economic meltdown were owned or bankrolled by banks now collecting billions of dollars in bailout money -- including several that have paid huge fines to settle predatory lending charges.

These big institutions were not only unwitting victims of an unforeseen financial collapse, as they have sometimes portrayed themselves, but enablers that bankrolled the type of lending that has threatened the financial system.

These are among the findings of a Center for Public Integrity analysis of government data on nearly 7.2 million "high-interest" or subprime loans made from 2005 through 2007, a period that marks the peak and collapse of the subprime boom. The computer-assisted analysis also reveals the top 25 originators of high-interest loans, accounting for nearly $1 trillion, or about 72 percent of such loans made during that period.

The Center found that U.S. and European investment banks invested enormous sums in subprime lending due to unceasing demand for high-yield, high-risk bonds backed by home mortgages. The banks made huge profits while their executives collected handsome bonuses until the bottom fell out of the real estate market.

Investment banks Lehman Brothers, Merrill Lynch, JPMorgan & Co., and Citigroup Inc. both owned and financed subprime lenders. Others, like RBS Greenwich Capital Investments Corp. (part of the Royal Bank of Scotland), Swiss bank Credit Suisse First Boston, and Goldman Sachs & Co., were major financial backers of subprime lenders.

According to the Center's analysis:

• At least 21 of the top 25 subprime lenders were financed by banks that received bailout money -- through direct ownership, credit agreements, or huge purchases of loans for securitization.
• Twenty of the top 25 subprime lenders have closed, stopped lending, or been sold to avoid bankruptcy. Most were not banks and were not permitted to collect deposits.
• Eleven of the lenders on the list have made payments to settle claims of widespread lending abuses. Four of those have received bank bailout funds, including American International Group Inc. and Citigroup Inc.

The Center also conducted a computer analysis of more than 350 million mortgage applications reported to the federal government between 1994 and 2007, and found that the amount of money spent by homeowners on their mortgages as a percentage of their income spiked sharply during the peak of the subprime boom.

The Subprime Universe

Subprime does not mean "lower than prime." In fact, it's just the opposite. Subprime lenders charge rates that are higher than prime, the rate offered to a bank's most creditworthy customers -- sometimes much higher. Subprime borrowers are generally people with poor credit who may have a recent bankruptcy or foreclosure on their record, according to the Federal Reserve.

Each year, under the Home Mortgage Disclosure Act, the federal government collects reams of data from lenders in an effort to determine whether they are adequately serving their communities and whether there is discrimination against minority borrowers. Some smaller lenders and some that do business in rural areas are not required to report. The government estimates the data account for about 80 percent of all home mortgages. In 2004, the Federal Reserve began requiring lenders to indicate when borrowers were being charged three percentage points or more above the rate of interest earned on U.S. Treasury bonds of a similar maturity.

The objective was to gather data encompassing "substantially all of the subprime mortgage market while generally avoiding coverage of prime loans," according to the Federal Reserve.

The Center analyzed these loans from 2005 through the end of 2007 to come up with its top 25 list of high-interest lenders. (The 2004 data were excluded due to poor compliance and other factors.) The market for these loans, driven by Wall Street investors, grew through the early 2000s, peaked in 2005, and crashed in 2007. The top 25 subprime lenders represent nearly 5 million loans.

There are multiple definitions of what constitutes a subprime loan. For the Center's criteria and to learn how the list was created, please see our methodology page.

Most of the top subprime lenders were high-volume, "non-bank" retail lenders that advertised heavily, generated huge profits, and flamed out when Wall Street benefactors yanked their funding. Nine of the top 10 lenders were based in California -- seven were located in either Los Angeles or Orange counties. At least eight of the top 10 were backed at least in part by banks that have received bank bailout money.

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