Solutions to Improving Subprime Mortgage Risks

By

ACKNOWLEDGEMENT

My thanks go out to all who have helped me complete this study and with whom this project may have not been possible. In particular, my gratitude goes out to friends, facilitator and family for extensive and helpful comments on early drafts. I am also deeply indebted to the authors who have shared my interest and preceded me. Their works provided me with a host of information to learn from and build upon, also served as examples to emulate.

DECLARATION

I, (Your name), would like to declare that all contents included in this thesis/dissertation stand for my individual work without any aid, & this thesis/dissertation has not been submitted for any examination at academic as well as professional level previously. It is also representing my very own views & not essentially which are associated with university.

Signed __________________ Date _________________

ABSTRACT

This paper explores the concept of subprime mortgage. Subprime mortgage is a kind of loan that is given to people who are not eligible for the conventional mortgage. It gained a lot of popularity during the previous decade. As the level of risks involved in this type of mortgage is very high for the lender, therefore, the lender charges a high rate of interest from the subprime borrower. It discusses various factors that have led the world towards financial crisis and the risks involved in subprime mortgage. Lastly, these risks can be managed by risk assessment strategy. There are number of ways in risk management and assessment could be carried out. The lenders should first need to understand that before providing loans, they should check the history of the borrower so that they are able to assess the risk concerned with these borrowers. These findings are carried out with the help of Qualitative methodology. The researchers interviewed different bank managers and employees of banks in of United Kingdom and in the light of their answers the research objectives were achieved. Furthermore, with help of interviews the researcher identified the causes of financial crisis and risks involved with subprime mortgage.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Research Background1

Research Aims and Objectives1

Research Questions2

Limitations and delimitations of the Research2

Conceptual Framework3

CHAPTER 2: LITERATURE REVIEW5

Mortgage Loans5

Definition of Subprime6

Subprime Mortgages6

Subprime Lending8

Characteristics of Subprime Mortgage10

Features of Various types of Loans13

Growth in Subprime Market16

The Growth of Lenders17

Subprime Mortgage Crisis18

Fraud in Mortgage19

Loan Default in Subprime Mortgage20

Loss22

Conclusion24

CHAPTER 3: METHODOLOGY25

Research Methodology25

Justification of Phenomenological Approach26

Key Terms26

Qualitative Research27

Research Rationale for Choosing the Qualitative Method27

Interviews28

Open-ended, Standardised interviews29

Fixed-response, Closed-ended Interview30

Justification of Research Tools30

Data Collection and Processing Procedures31

Interviews31

Literature Data Collection32

Participants34

Ethical Considerations34

Role of the Researcher36

Researcher Bias37

Validity37

Reliability38

Reliability/Dependability40

CHAPTER 4: DISCUSSION AND ANALYSIS41

Main causes of Financial Crisis41

Securitization45

Mortgage Backed Security45

Interest-based Loans46

Change in House Value47

Risks involved in Sub-prime Mortgage49

Conclusion53

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS54

Conclusion54

Solution towards improvised Sub-Prime Mortgage Lending57

Proper Pricing58

Responsible Lending60

Risk management and Portfolio Management practices62

Issues related to consumer protection62

REFERENCES64

APPENDIX68

CHAPTER 1: INTRODUCTION

Research Background

Issues that have been faced by the world's economy, developed over a long period. For around a decade or so, a huge amount of money was flowing into United States from foreign investors. This huge influx of money in financial institutions and banks ...