BORROWING OCCURS when a borrower has confidence in his future and a lender has confidence that the price he is getting for the use of his money–the interest rate–compensates him for the risk that he will not be repaid. Both borrower and lender sometimes miscalculate, and wish they had heeded Polonius’ interdiction, “Neither a borrower not a lender be.”
That’s the dominant sentiment in the so-called sub-prime market, where lenders last year made $605 billion by giving mortgages to people with poor credit. Those borrowers, who account for about 20 percent of the home-loan market, include couples with comfortable incomes who find that they cannot meet the mortgage payments on the too-large and too-expensive homes they bought, and low-income buyers who fall behind in payments, sometimes in the first month, because of an interruption in their employment, a family illness, or one of the other problems that those living on the economic margin often experience. The universe of sub-prime lenders include companies such as HSBC, which may be out-of-pocket to the tune of almost $7 billion.
