Over at Calculated Risk there's an excellent primer not just on what subprime is, but on what good basic mortgage underwriting (or, indeed, financial underwriting of any type is about.)

That said, what it’s about is just working through the complexity of the variations on three things that have been the core of mortgage underwriting since roughly the dawn of time: the three Cs, or Credit, Capacity, and Collateral. Does the borrower’s history establish creditworthiness, or the willingness to repay debt? Does the borrower’s current income and expense situation (and likely future prospects) establish the capacity or ability to repay the debt? Does the house itself, the collateral for the loan, have sufficient value and marketability to protect the lender in the event that the debt is not repaid?

There is no New Paradigm, there was no New Paradigm, there is not going to be a New Paradigm. The Cs are the Cs. What we “innovated” was our willingness to believe that we had established the Cs with indirect or superficial measures (that are, not coincidentally, cheap and fast compared to direct measures). We looked at FICOs—scores produced by computers—instead of full credit reports and other documents to supplement them. We looked at the borrower’s statement of income or assets, not the documents; when we got docs, we looked at the last paystub or the current balance of an account, not the documentation of a long enough period to establish stability of income or source of account balances. We looked at AVMs instead of full field appraisals. We read the Cliff’s Notes.

I can't hammer this in enough. Things don't change fundamentally all that often, and on the very rare occasions when they do change, usually because of changes in things like how fast one can communicate, the cost of transportation, the way military force works, or the very basic stuff like the means of production, it tends to change rather slowly. Even fast changes tend to take a couple decades.

Underwriting, however, has not changed from the basics. And I doubt it ever will.

Go read the rest. It will reward your time.