Subprime Loans: The Pros and Cons - loan.com.
Subprime mortgage, a type of home loan extended to individuals with poor, incomplete, or nonexistent credit histories. Because the borrowers in that case present a higher risk for lenders, subprime mortgages typically charge higher interest rates than standard (prime) mortgages. The most common type of subprime mortgage contract offered in the United States is the adjustable rate mortgage.
A subprime mortgage generally refers to loans made to borrowers with low credit scores, and while they're not as common in the current loan-making landscape, they are slowly making a comeback.
The sharp rise in subprime mortgage lending began in the mid-1990s and accounted for roughly 20 percent of home loans in 2006 (source: Federal Reserve).On the plus side, subprime mortgages allow people with poor credit a chance to get into a market previously unavailable to them with standard home loans.The downside of this scenario is that these loans are more likely to go into default.
Troubles in the subprime mortgage industry seem to be spreading. The stock market is in turmoil. Alan Greenspan and other economists say the economy is being hurt. Consumer groups predict that up.
Lending to individuals who have a bad credit history or relatively low income. A higher interest rate is charged for such loans because risk to the lender is higher. Excessive subprime lending is often pointed to as one of the major causes of the financial crisis of 2008-2009.
The causes of the crisis in subprime mortgages have become clear. They started with poor underwriting practices, which became legion. But damage was propagated at each stage of the complicated process in which a risky home loan was originated, then became an asset-backed security that then formed part of a collateralized debt obligation (CDO) that was rated and sold to investors.
Subprime mortgage lending earned a bad reputation in the years leading up to the financial crisis of 2007-2008, and rightfully so. In the midst of a freewheeling lending environment that ignored.