Subprime lending or subprime loans was created for the borrowers who do not meet the criteria or wasn’t able to afford the normal prime loans. This type of loan is targeted for borrowers who have poor credit scores or have had poor credit histories. These borrowers also have weak documentations with regards to their income sources. But these loans come with higher interest. Borrowers will get attracted so easily as they will be offered to pay fixed monthly repayments with relatively low interest...
Today million are still jobless with an unemployment rate at 9.7%, credit is tight, and businesses are slowly building back up. The sub-prime financial crisis of 2007 and 2008 financially destroyed the lives of many, but how could this have happened?
Sub-Prime Mortgage: The Snowball Effect Intermediate Macroeconomics Sub-prime mortgages were a lucrative new market idea, pushed by the government, executed by the lending institutions, in order to provide everyone the American Dream. During the expanding economy, this dream became a reality—untested and unchecked—as low interest rates fueled the desire of investors to make dreams come true! Ultimately, the vicissitudes of the economy turned downward and the snowball effect began while financial sectors and investors scrambled to catch the falling knife. While history is being written this very day and hindsight is 20/20, we can reflect on the ideologies and policies that brought forth the worst economic downturn since the Great Depression.
The 2008 Recession Between January 2008 and February 2010, employment fell by 8.8 million, the largest decline in American history. The 2008 Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing bubble. Job losses during the recession meant that family incomes dropped, poverty rose, and people all over the country were suffering. Things like this don’t just happen. Policy changes incorporated with the economy are often a major factor.
By 2003, lenders were running out of borrowers and to keep the fire burning they would make loans to high risk borrowers. For example, subprime lending jumped from $145 billion in 2001 to $625 billion in 2005. Lots of these loans were done without any money down. Monthly rates would increase higher than many of the borrowers’ monthly income. The fact that housing prices had never fallen distracted many from reality. In 2007, the housing boom was over. In October $20 billion in losses in the financial sector, $11 billion of which were primarily subprime collateralized debt obligations
Subprime lending occurs when a financial institution lowers lending standards and lends to individuals who cannot prove their credit worthiness, usually possessing a credit score below 600. This also includes individuals who lack sufficient income or assets. Individuals who cannot secure a conventional mortgage will turn to subprime mortgages, securing their loans at a higher than prime interest rate. Not only will there loans have higher rates of interest, these rates can climb. Unlike traditional mortgages, there is often a pre-payment penalty with a subprime mortgage as well as other miscellaneous fees. The originators of these loans will often pool them together into mortgage securities which will then be sold off to investors, removing the loans from their balance sheets.
Bank of America and the Mortgage Crisis Sharply rising mortgage foreclosure rates during the economic recession between 2007 and 2009 have drawn a significant amount of attention from scholars and policy makers. There has been an abundance of research probing factors, particularly sub-prime lending and neighborhood characteristics, contributing to foreclosures (Li). The present paper, investigated causes of the mortgage disaster with relevance to Bank of America. Bank of America is one of the major financial institutions affected and is losing money in the industry. It is hypothesized that the bank and other financial institutions are still struggling in the industry, due to several reasons.
A few years ago, there were several sub-prime mortgage defaults. People lied about their income in order to get a loan. The loan brokers in many instances did not even bother to verify their income, did not require down payments, and eventually made some very bad loans that really could never be paid back. Through the greed of the loan broker, many of these loans were entered into through deceptive practices. The individuals receiving the money, through their own greed, went recklessly into debt. A typical story comes from the city of Cleveland. They have made the foreclosure problems worse and have lost millions in tax dollars by helping people buy homes they could not afford. The city provided down payment loans of up to $20,000 to mostly low-income buyers. This was through the federal Afford-A-Home program. This program did little to determine whether the people actually had the financial means to afford staying in their homes. Things remained unstable because banks where mandated to make loans to unqualified borrowers under the federal program; or face problems with regulators.
Although there has not been a consensus on an exact causation —due to its global nature—there has been unanimity on a number of factors. As in the case of its sister crisis (the Great Depression), many scholars acknowledge that before this cataclysm struck, the preceding economy did in fact experience a “boom” period. Most critics are also in accordance that the trigger of this crisis had to involve the subprime mortgage bubble—which collapsed in the United States—however, that alone could not represent the exact causality of this crisis. Just as in the Great Depression, there were a variety of contributing factors that resulted in this financial catastrophe.