Subprime Crisis Essay

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What Is Subprime Crisis

Subprime crisis, also regularly known as the mortgage meltdown is a financial crisis that occurred between the years 2008 to 2009. It is a result of excessive borrowing to numerous homebuyers who have poor credit scores. This act of lending is called subprime lending. During this period, loads of homebuyers defaulted on their monthly payments as their interest rates increased with time. With that, there was a sharp upsurge in mortgage foreclosures. This led to the numerous failures in participating financial institutions that act as subprime or mortgage lenders. As if this was not crucial enough, all this also took a toll on investors who have played a role in facilitating subprime lending to the borrowers by buying mortgage-backed bonds. Although it has only brought visible attention in the year 2008, it started with HSBC who announced that they would be putting aside US$11 billion to cover costs due to rising losses and defaults in subprime mortgages in February 2007. Since then, major losses started to hit other financial institutions and the mortgage market started to collapse. The subprime crisis was caused by a few major factors and it involved several major parties in the US.

What Is Subprime Lending

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...

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...e the housing values are likely to increase with the demand, investors predicted that this mortgage-related investment products would bring higher revenue. In addition, the respectable CRA companies have given high ratings to these products, allowing the investors to feel safe investing in it.

Relaxed Standards for Mortgage Loans

When the regulations was stricter before, most of the mortgages lent out with fixed rates will require a down payment of minimum 20% of the house price. On top of that, homebuyers will need to prove their income was sufficient to ensure monthly payments being made by providing supporting official documents. However, Community Reinvestment Act, which is a federal organization whose aim is to encourage financial institutions to meet the needs of communities, enforce the banks to extend their mortgage lending to lower income families.
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