Who Pays for the Subprime Lender Meltdown?

Scrambling to grab that elusive “American Dream” of homeownership, millions plunged into the subprime mortgage market to build wealth through appreciation (if not speculation). Pundits cheered as the ownership rate crept up, lauding the pluck of aspirational minority and immigrant families.There’s a reason it is called subprime, though. Lenders offered a smorgasborg of loan “products,” but the bottom line was that they are all very costly for the borrower – often entailing adjustable-rate surprises in the 30 percent or higher range.

2 minute read

March 5, 2007, 1:24 PM PST

By James S. Russell


Scrambling to grab that elusive "American Dream" of homeownership, millions plunged into the subprime mortgage market to build wealth through appreciation (if not speculation). Pundits cheered as the ownership rate crept up, lauding the pluck of aspirational minority and immigrant families.

There's a reason it is called subprime, though. Lenders offered a smorgasborg of loan "products," but the bottom line was that they are all very costly for the borrower – often entailing adjustable-rate surprises in the 30 percent or higher range.

With prices flat and interest rates creeping up, defaults on subprime loans are skyrocketing, with many borrowers falling behind after just a few months. The lenders who have not yet filed for bankruptcy are stampeding to the exits. A great number of them, though, took billions out of these businesses before they went belly-up.

the real cost will be born by the borrowers, who have no financial cushion. They had hoped that home appreciation would build some wealth. Wages, by and large, have not done the job even with a growing economy.

Their communities will also pay. A lot of those subprime buyers have snapped up the little ranches and Cape Cods in the 1950s inner suburbs, giving a new lease on life to communities that professionals and more affluent buyers have skipped over. Though the houses in these cul de sacs can still look neat, with their hedges and lawns nicely clipped, many of these communities have stagnated, sunk into poverty, or hovered at the tipping point for years. Even modest appreciation would solidify middle-income status for struggling wage earners, but the outlook now is for slippage, possibly long-term price drops.

As the pain spreads, there will be much handwringing and fingerpointing (assuming it does not incite a broader market meltdown as some fear). But the warning bells were rung early and often. No one in Congress, at Freddie Mac, Fannie Mae, or in the mortgage industry should have been unaware of the lax regulation and the likelihood of high levels of defaults. But the pickings were too lush, and the lobbying largesse was spread too thick.

And when things stabilize, the mess will get swept under the rug, because, after all, maybe a few hundred thousand borrowers, or a few million – as in the similarly greed-driven savings and loan collapse in the late 1980s – will be hurt, and they'll be largely invisible because they don't stroll the board rooms of banks or live in the nice neighborhoods of media executives.

There used to be names for this kind of thing, though. One was fraud and the other was usury. Maybe our language will be enriched by them again.


James S. Russell

James S. Russell is the architecture critic for Bloomberg News, which reaches 260,000 professionals and 350 publications worldwide. Mr. Russell's commentaries also appear on the Bloomberg Muse website. He is a regular guest on Bloomberg radio and TV. For 18 years Mr.

portrait of professional woman

I love the variety of courses, many practical, and all richly illustrated. They have inspired many ideas that I've applied in practice, and in my own teaching. Mary G., Urban Planner

I love the variety of courses, many practical, and all richly illustrated. They have inspired many ideas that I've applied in practice, and in my own teaching.

Mary G., Urban Planner

Cover CM Credits, Earn Certificates, Push Your Career Forward

Logo for Planetizen Federal Action Tracker with black and white image of U.S. Capitol with water ripple overlay.

Planetizen Federal Action Tracker

A weekly monitor of how Trump’s orders and actions are impacting planners and planning in America.

July 16, 2025 - Diana Ionescu

Green vintage Chicago streetcar from the 1940s parked at the Illinois Railroad Museum in 1988.

Chicago’s Ghost Rails

Just beneath the surface of the modern city lie the remnants of its expansive early 20th-century streetcar system.

July 13, 2025 - WTTV

Blue and silver Amtrak train with vibrant green and yellow foliage in background.

Amtrak Cutting Jobs, Funding to High-Speed Rail

The agency plans to cut 10 percent of its workforce and has confirmed it will not fund new high-speed rail projects.

July 14, 2025 - Smart Cities Dive

Worker in yellow safety vest and hard hat looks up at servers in data center.

Ohio Forces Data Centers to Prepay for Power

Utilities are calling on states to hold data center operators responsible for new energy demands to prevent leaving consumers on the hook for their bills.

July 18 - Inside Climate News

Former MARTA CEO Collie Greenwood standing in front of MARTA HQ with blurred MARTA sign visible in background.

MARTA CEO Steps Down Amid Citizenship Concerns

MARTA’s board announced Thursday that its chief, who is from Canada, is resigning due to questions about his immigration status.

July 18 - WABE

Rendering of proposed protected bikeway in Santa Clara, California.

Silicon Valley ‘Bike Superhighway’ Awarded $14M State Grant

A Caltrans grant brings the 10-mile Central Bikeway project connecting Santa Clara and East San Jose closer to fruition.

July 17 - San José Spotlight