Subprime Lending



Subprime Lending

Introduction

Subprime borrowers and lending is defined by The U.S. Federal Deposit Insurance Corporation (FDIC) as a term refers to the individual borrower's credit characteristics. Subprime borrowers have decreased the value of credit histories including payment delinquencies as well as a number of serious concerns like bankruptcies, judgments and charge-offs. Reduced repayment capacity is also displayed by them as calculated by, the ratios between income and debt, debt-to-income ratios, credit scores or various standard that can encompass the borrowers with without completing their financial records. The Subprime loans are generally termed as the loans that present some of the common features at the point of purchase or origination. These loans possess higher possibility to face various risk of default as compare to the loans that are borrowed by the main borrowers. Such a case, when a borrower is failed to return mortgage payments to the providers of loan (financial firm or a bank) on time then the lender has the authority to buy any property, through a process termed as foreclosure (Bitner, 2008).

Research Questions

Q1. What were the actual causes that led to the downfall of economic condition?

Q2. What were the assumptions that were described related to the basis of the U.S economic and financial system contributing to the occurrence of crisis?

Q3. What were the important catalysts of the subprime crises?

Topic Research

The problems that have been observed today were actually developed many years ago. A huge amount of money has been flowing in United States for more than ten years. This money has been invested by foreign investors. It was turned out to be much easier for the Americans to attain more credit due to the large amount of money invested in U.S. financial institutions and banks combine d with low rates of interest. Along with the wrong perception, home values would begin to increase and ultimately led to wrong decisions (Kristropher, 2010).

There were a number of mortgage lenders who approved loans for borrowers without any cautious inspection of their affordability to pay back. Due to this, many borrowers received loans beyond their affordability by assuming that they would be able to sell their houses at much higher prices and would be able to return the loan. Later on financial institutions and individuals revived their policies and improved their criteria of providing loans evaluating the past record (Edward, 2007).

Optimism related to the costs of houses also produced positive impacts on the increment of housing construction. Ultimately increase in the number of houses constructed, increased the number of people who are intend to purchase them. Due to the increased demand of new houses, costs of houses fell down which led in creating more problems like the borrowers who borrowed in minimum rates rising had been designing strategies to refinance or purchase their houses before the occurrence of the adjustments that were supposed to be to the inability of refinancing. Ultimately, as a consequence, there were found a number of mortgage holders who started to fail to pay with the beginning of ...