Summary of Subprime Loans, Their Lender Risks, and Threats Posed to Borrowers
Every wondered how awesome a bank was for giving you a loan for a house or car, even though you had low or lower than average credit? Ever wondered why they were so generous to make you payments so low that you could afford to pay them back? The payment back might be over a long period of time; however, you have the ability to do so and afford other things. The issue with that is chances are, you might have been a victim of a subprime loan. Banks extend credit to individuals that do not qualify for prime rate credit. This is because the interest rates were supposed to rise gradually throughout the life of the loans. A trick to this loan was the initial interest rates. They appeared doable, low interest rates in the beginning of the subprime loan attracted these targets, only to receive a higher interest rate throughout the maturity of the loan. This caused buyers to refinance and pay more. Fees, refinancing, and higher interest rates made subprime loans unethical. This is very legal, however, very unethical. The reason being is that this loan targeted specifically genres of people that would not be able to pay this loan of the first time without refinancing the loan. On top of this, the loans were sold to Wall street after the banks have peaked on the profits of the loan. According to Thibodeaux (2008), this problem began in the 1990’s, however, the crisis was noted in the early 2000’s. So, what does this mean to the home owner or the borrower? Debt. The borrower would always be in debt. Another problem is that the same borrower could possibly lose their homes, cars, and be in more debt because they had to default on their loans (Watkins, 2011). The problem happened after in 2007, with a decline in mortgage lending, here lenders and brokers invested greatly in homes that they planned to sell through the subprime market to which no one was now buying. They had substantial loses and raised interest rates to tried and gain some financial loses back. The effects of subprime loans became a financial problem for all globally.
Thibodeaux, W, (2008), What are the Effects of Subprime Mortgages on GAAP?
Watkins, J. P. (2011). Banking ethics and the Goldman Rule. Journal of Economic Issues,45(2), 363-372. doi:10.2753/JEI0021-3624450213