“Sub-Prime Mortgage Loans offer both benefit and dangers for the financial system and the real economy.” Discuss.

Name

Name of Instructor /Professor

Subject /Course Title

10 November 2007

Sub-prime Mortgage Loans

One of the recent problems that the United States has suffered is brought about by the crisis in home lending or mortgage industries . This has affected the nation 's economy and has left an enormous headache to the people . This has been caused by stacking of interest rates which the lenders are unable to pay . There are various types of lending in mortgage industries , and all of it has its positive and negative points However

, there is one type which has greatly affected the mortgage loan industry and it has left a hole in both the lenders and the investor 's pocket . This type of mortgage loan is sub-prime loan industry , which has affected not only the mortgage loan market but the whole economy of the United States as well

The types of mortgage loans are the prime loans , sub-prime loans , and the alt-a ' loans . Even though these are different aspects of lending they have each contributed to the financial crisis that the nation is experiencing . These could be accounted to the negative effects resulting from the loans of different people from different walks of life . These people were unable to keep up and pay for these loans , thus resulting to the lending crisis that the country experiences right now . There are several issues that arose from this crisis , like how these lending problems have hampered consumer spending , since they would allot their money more on to pay for these loans . Because of this , the nation 's economy would experience a slowed growth , affecting the global economy as well ADDIN EN .CITE Keenan2Terry KeenanGet The Facts On The Sub-Prime Mortgage Meltdown2007November 102007FoxNews .comhttp /www .foxnews .com /story /0 ,2933 ,258926 ,00 .html (Keenan br

Prime loans and alt-a ' loans both have positive and negative effects in the mortgage loan industries of the country ADDIN EN .CITE Mortgage Insider200744 412Mortgage Insider ,Prime problem2007August 182007http /mortgage .freedomblogging .com /2007 /07 /30 /prime-problem (Mortgage Insider . But these effects don 't compare to that of the sub-prime loans . These sub-prime loans became the concern not only by those people involved in the mortgage industry , but also by the whole economy of the country . Issues concerning these sub-prime loans came up early last year , and are still present today

Benefits of Sub-Prime Mortgage Loans

When we talk about the benefits of sub-prime mortgage loans , we always consider both sides of the deal : benefits for the subprime lenders and benefits for the subprime borrowers . However , there are more risks for the subprime lenders than for the borrowers . Subprime lenders often resort to various methods in to even out these risks with the subprime borrowers

The benefits for the subprime lenders are usually with the higher interest rates of these mortgage loans . These lenders can also charge their customers with higher late fees , high over-the-limit charges yearly payments , as well as the upfront payments for subprime credit cards . Because of these additional fees as compared to the regular fees for the prime borrowers , these payments often get stacked and compound resulting to higher returns for the subprime lenders . The subprime borrowers are aware of these things , and their unsuitability for credit is what puts them at this state ADDIN EN .CITE Guttentag2Jack GuttentagWhat is a Sub-prime Mortgage Lender ?2007August 182007http /www .mtgprofessor .com /A 20- 20Type 20of 20Loan 20Provider /what_is_a_su b-prime_lender .htm (Guttentag

On the other hand , the subprime borrowers are benefitted because they are offered an opportunity to gain access to credit even though they are classified as having a less than ideal credit record . Another positive aspect of subprime lending and mortgages is that there is a method of credit repair for the borrowers ADDIN EN .CITE Guttentag2Jack GuttentagWhat is a Sub-prime Mortgage Lender ?2007August 182007http /www .mtgprofessor .com /A 20- 20Type 20of 20Loan 20Provider /what_is_a_su b-prime_lender .htm (Guttentag . If these borrowers are able to sustain a good payment record , then they will be able to refinance into the mainstream rates for the loans after a certain amount of time

Subprime mortgage loans are a lot riskier because they are loans being offered to those who are unable to qualify under the traditional criteria for the loans , and has limited credit history as well as bad or blemished credit records . These subprime mortgages are usually given to borrowers who doesn 't have a legal migration status in the country , and that these subprime mortgage is their only way to have money for the mean time

Dangers of Sub-prime Mortgage Loans

Subprime lending is the practice of offering loans to certain borrowers which are not fit or does not qualify for prime loans - they don 't achieve the best market interest rates because of their poor credit history ADDIN EN .CITE Guttentag2Jack GuttentagWhat is a Sub-prime Mortgage Lender ?2007August 182007http /www .mtgprofessor .com /A 20- 20Type 20of 20Loan 20Provider /what_is_a_su b-prime_lender .htm (Guttentag . This puts both the people offering loans and the borrowers at risk , because subprime lending puts in high interest rates , plus the fact that these people have a poor credit history . With the poor credit history , the lender would be forced to put on a higher interest rate as compared to that of prime lending . In short , subprime loans are for those who didn 't qualify for prime loans

Subprime lending has contributed the most to damage in the financial crisis that the nation has been experiencing , especially in the aspect of home lending . There is no one to direct the blame on , since both the lenders and the borrowers have shortcomings . Both the lenders and the borrowers know the risks of subprime lending . For the part of the lenders , they know that they are dealing with borrowers who have a poor or deficient credit history , which these people would surely find it difficult in paying for what they have borrowed ADDIN EN .CITE The Independent2The Independent , Sub-prime lending slump sends markets into freefall2007August 182007http /news .independent .co .uk /business /news /article2853843 .ece (The Independent . For the part of the borrowers , they know that these lenders would surely put high interest rates in their loans to compensate for the deficient credit history that these borrowers have

Subprime lending is said to operate through risk vs . reward , wherein they risk investing on those with poor credit history , since they will be charging higher interest rates . Because of this , these subprime lenders will have a higher rate of return . They will charge higher interests to subprime borrowers with poorer credit histories . This is because of the risk that they are taking with such customers is higher

In the recent subprime crisis of the United States , the lenders and the borrowers both found themselves in a situation that they can 't handle Observers predicted a meltdown in the subprime mortgage industry especially when there was a great increase in mortgage foreclosure Because of this , a lot of subprime mortgage companies have failed and went bankrupt . The subprime mortgage crisis has caused a chain reaction it affected the stock market , further threatened the country 's housing market and has slowed the nation 's economy as a whole . It has further threatened to affect other country 's economies as well , since the U .S economy plays a big role in the global market stability , and the economy of other nations

With the current financial crisis that the country is suffering , it is expected that it will also affect the country 's economy . The solution to this problem lies in the hands of the people , since they are the ones who should really dictate how these loans should be . It is their responsibility to maintain a good credit history for them to be able to avail privileges like has a prime status . Lenders are also partly responsible for the home lending crisis , since they took advantage of the people who have poor credit history , imposing interest rates that seemed impossible to pay

Works Cited

ADDIN EN .REFLIST Guttentag , Jack "What Is a Sub-Prime Mortgage Lender " 2007 . August 18 2007 http /www .mtgprofessor .com /A 20- 20Type 20of 20Loan 20Provider /what_is_ a_sub-prime_lender .htm

Keenan , Terry "Get the Facts on the Sub-Prime Mortgage Meltdown 2007 . FoxNews .com . November 10 2007 http /www .foxnews .com /story /0 ,2933 ,258926 ,00 .html

Mortgage Insider "Prime Problem . 2007 . August 18 2007 http /mortgage .freedomblogging .com /2007 /07 /30 /prime-problem

The Independent " Sub-Prime Lending Slump Sends Markets into Freefall 2007 . August 18 2007 http /news .independent .co .uk /business /news /article2853843 .ece Sub-Prime Mortgage Loans PAGE \ MERGEFORMAT 4 ...