Booyah Breakdown: Subprime Time

Let's say our subprime guy wants to buy a house. He sits down with a subprime lender, and they go over his financial position. Everyone agrees that he can afford the monthly mortgage payment -- even with the high fixed interest rate.

Our subprime guy is then (presumably) told that as long as he makes 24 consecutive mortgage payments at that fixed rate, his credit score will improve. Then at the end of the fixed-two-year term, he will be able to refinance into a better, lower-rate loan.

Seems simple enough, right? Just pay your monthly mortgage bill, and we'll assume you're on your way to the American dream.

But we all watched the Odd Couple, so we know what happens when you assume. (More on that later.)

The Lenders

A subprime lender is an institution that lends money to borrowers who don't qualify for mainstream -- or prime -- loans. The industry has been around for years but was little noticed outside of daytime TV commercials. Think of the old-school subprime houses, like Champion Mortgage ("When your bank says no, Champion says Yes!") and Phil Rizzuto's commercials for the Money Store.

These days, companies such as New Century, Fremont General (FMT Quote) and IndyMac (NDE Quote) are the ones we've been hearing about.

But big bigger mortgage houses, such as HSBC (HGC Quote), Washington Mutual (WM Quote), Countrywide(CFC Quote) and Wells Fargo (WFC Quote), have subprime divisions as well. (Check out Cramer's dirty dozen list of subprime shorts.)