Other banks which had lent to the same bad borrowers would have been forced by the government's actions to downgrade their loans too.
As capital shrinks, creditors have to clamp down on lending, to good and bad borrowers alike, no matter what the Fed may do.
Have banks been more likely to cut off "bad" borrowers who happened to owe a lot than good low-risk borrowers who can be asked to pay their debts in full?
But the economic damage went far beyond the "bad" borrowers, as evidenced by deep recession, ensuing slow growth, high unemployment and crashing home values — all of which has now harmed millions of homeowners who never went near a subprime mortgage.
The plan is a desperate effort to avoid being sent to Japan's Industrial Revitalisation Corporation, which was set up last year to take bad borrowers away from the banks and reshape them into something (hopefully) more sensible.
Hence, the growing number of academic studies about credit scoring shows a variety of classification methods applied to discriminate good and bad borrowers.
Since the expected gains from the loan contract are a function of both the pricing and the probability of repayment, when lenders can't distinguish good borrowers from bad borrowers, all borrowers would be charged the same interest rate that reflects their pooled experience.
Fund officials say that would set a bad example for other big borrowers like Brazil and Turkey.
One reason was that the subprime companies were starting to run out of risky borrowers to make bad loans to — and hitting a brick wall.
"Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting," Terence Edwards, Fannie Mae's executive vice president for credit portfolio management, said in a statement.
Rather than gain a bad reputation, borrowers try hard to avoid going bust.Room for improvementAs things stand, creditors are clearly poorly protected.
