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Prime, Alt-A and Subprime - The Three Categories of Borrowers

Published by Lawrence Roberts | December 26th 2008 | Views:

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Borrowers are broadly categorized by the characteristics of their payment history as reflected in their FICO score. FICO risk scores are developed and maintained by the Fair Isaac Corporation utilizing a proprietary predictive model based on an analysis of consumer profiles and credit histories. These models are updated frequently to reflect changes in consumer credit behavior and lending practices. The FICO score is reported by the three major credit reporting agencies, Experian, Equifax and TransUnion.

Borrowers with high credit scores have generally demonstrated a high degree of responsibility in paying their debt obligations as promised. Those with low credit scores either have little or no credit history, or they have a demonstrated track record of failing to pay their financial obligations.

There are 3 main categories of borrowers: Prime, Alt-A, and Subprime. Prime borrowers are those with high credit scores, and Subprime borrowers are those with low credit scores. The Alt-A borrowers make up the gray area in between.

Alt-A tends to be closer to Prime as these are often borrowers with high credit scores which for one or more reasons do not meet the strict standards of Prime borrowers. In recent years one of the most common non-conformities of Alt-A loans has been the lack of verifiable income. In short, "liar loans" are generally Alt-A.

As the number of deviations from Prime increases, the credit scores decline and the remainder are considered Subprime.

The Great Housing Bubble witnessed an unprecedented extension of credit to Alt-A and subprime customers. These loans ultimately went into default and foreclosure. This created a downward spiral of declining prices that is still going on in 2009.
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