Does anyone else find it a bit ironic that the US government gave away 4.6 trillion including direct payments to individuals and yet the number of subprime borrowers has surpassed precovid levels. Why are more borrowers now classified as subprime and what does this mean for real estate? Why is the middle now shrinking?
Direct payment to individuals supposed to change behavior
The theory behind direct payments to individuals by the government on multiple occasions is that the additional money would drastically alter people’s lives by suddenly having cash. Unfortunately every single study has shown that direct payments to individuals have done nothing to alter their current trajectory and in some cases it has made the situation even worse. Long and short, the theory of guaranteed incomes for all that is championed by many cities has been proven once again that it is a serious flop.
What is in the data on the increase in subprime borrowers?
The share of consumers in the subprime credit risk category (the lowest of the credit score classifications) has reached levels not seen since 2019, a sign that a growing number of borrowers are in poor financial health.
Subprime borrowers accounted for 14.4% of consumers tracked by credit reporting firm TransUnion in the third quarter, up from 13.9% in the same period last year. It’s the highest share for the period since 2019, when 14.5% of borrowers fell into the subprime category.
The number of higher-risk borrowers shrank during the Covid-19 pandemic and immediately after as consumers took advantage of reduced expenses and relief programs to pay down debt, according to TransUnion. The tier has since grown for four consecutive years.
The middle is shrinking
When looking at the data, the shrinking of the middle jumped out. The super prime borrowers, the top credit scores, are increasing a little, while the subprime at the opposite end of the spectrum is also increasing. Look at the prime borrower, one step below super prime, this has dropped from 17.4 to 15.6 in 2025, a 10% decline. We are seeing the same splits in the economy where high net worth borrowers are continuing to spend while price conscious shoppers are pulling back.
Why are there more subprime borrowers now?
There are three primary reasons that the number of subprime borrowers is now increasing.
- Pandemic relief was temporary and did not change behavior: the cash by the government initially changed the credit scores of many borrowers as they could use the cash to pay down CC debt. Fast forward and nothing really changed, after the pandemic money ran out, the same percentage of borrowers are struggling today as before.
- Student loan restart: During the pandemic most people did not pay student loans for around 4 years or so, as those payments restarted, this has further impacted credit scores as delinquencies increased.
- Credit scores artificially inflated: During the pandemic, scores were artificially inflated due to no medical debt showing in many states, no student loan data, and in many cases, evictions were halted due to Covid restrictions which further inflated credit scores. Long and short the surge in credit scores was a façade which we are now seeing today.
What does the rise in subprime borrowers mean for real estate
The rise in near prime and subprime and the decrease in the middle market of near prime will have long term implications on real estate.
- Less available qualified buyers: As credit scores take a hit from borrowers, the prospect of owning a home is greatly decreased. With the surge in subprime and the drops in nearly prime and other tiers the available buyers have been greatly decreased.
- More renters at mid/lower prices: With credit scores being impacted there will be a higher demand for more lower/mid-priced units. Unfortunately, the market has been focusing on the high-end market, but the big demand will be at more cost-effective price points.
Rise in Subprime should not be surprising
The market seems to be very surprised by the increase in subprime or non-prime borrowers and yet this change should come as no surprise. Covid was a blip that inflated credit scores but didn’t fundamentally change the behaviors or events that led to the low credit scores in the first place. This has led to a surge in subprime borrowers.
The real surprise is why is the middle of the credit spectrum shrinking with a little more moving up to super prime, but the real changes are downward pressures on scores for the majority of Americans. The trend of the shrinking middle will be important to watch as it could be an early sign of what is to come in the next credit cycle.
Additional Reading/Resources
https://www.gao.gov/products/gao-23-106647
https://www.fairviewlending.com/foreclosures-spikefairview-interview-mortgage-professional-america/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
My day job is and continues to be private real estate lending/ hard money lending which enables me to have a unique perspective on the market. I don’t accept any paid sponsorships or ads on my blog to ensure accurate information. I’ve been writing this for almost 20 years and have over 30k subscribers. Please like and share my blogs on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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