By Definition Unclear
One of the big takeaways from the housing crisis was the danger of having loose definitions and broad classifications for loans. Presumably, if there had been more concrete definitions of terms like "subprime" or "alt-A," investors would have had a better idea about what they were actually buying. There might not even have been a market for some of the riskiest loans marketed under these terms.
In an online poll, just over half of respondents, 53%, agreed with the premise of our story, that if and when subprime or alt-A lending does return, there needs to be a more concrete definition of those terms. But nearly a third, 31%, said such terms should be abandoned altogether, along with the pretense that tidy categories can describe complex products. Just 16% said such boom-era terms should be replaced with new ones.
What's in a name? Plenty, according to some linguistics experts quoted on the blog.
"Certainly, the names were changed in part to get rid of some of the stink that the word 'subprime' had acquired," said Grant Barrett, co-host of the national radio program "A Way with Words." "But there's also basic marketing there. A lender could differentiate itself by coming up with a new word and so stand alone. It might also make unsavvy consumers less likely to realize that all these variations should be compared as apples to apples."
Sophia Malamud, an assistant professor of language and linguistics at Brandeis University, broke it down this way: "Sub is a scalar prefix which means 'under a particular value on some scale,' so 'subprime' means 'lower than the established criteria for 'prime.' "
On the other hand, the prefix "non," Malamud said, "carries no immediate meaning of being below something on a scale." However, "it has a connotation that the speaker was not in a position to use the term without 'non,' " she said. "So 'nonprime' means, literally 'other than prime.' " Essentially, the user of the term "nonprime" acknowledges the loan did not make the "prime" cut.
At the other end of the spectrum, using "super" in front of prime connotes that the loan is "above the established criteria for 'prime,' " Malamud said.
Not Afraid to Say It
Score one for the little guys.
With so many other battles to fight, it's unlikely any large banks are willing to publicly criticize the Federal Deposit Insurance Corp.'s proposal to tie their deposit insurance premiums to a broader range of risk measures. But our story prompted Sam Moyer, president of Heritage Bank in Aurora, Neb., to share his views. "The real need is to change the base that FDIC insurance is paid on," he wrote. "Deposits and liabilities should both be in the base. Better yet, think of it this way: assets are what go bad and cost the insurance fund huge losses. It's the assets of the banks, not the liabilities. Both insured and uninsured liabilities are used to fund assets. It is the assets that deteriorate in value. So risk premiums should be based on the volume of risk-based assets, just like certain capital requirements are."