Subprime Lending - Admission/Application Essay Example

Subprime Lending Introduction s Mortgage loans are often differentiated as either prime or sub-prime, depending on their credit risk that is the risk of non-payment of a loan by the borrower. The interest rates are higher on subprime mortgages which eventually reflect higher bargaining risk towards the borrower (Federal Reserve Bank, 2007). In this paper, the origination, causes along with the fallout and the after fallout scenario of the subprime mortgage industry market has been focused and discussed.

The Evolution of Subprime Lending Mortgage Market It was not until the mid to late 1990s that the strong growth of the subprime mortgage market achieved a severe attention. The growth of subprime lending in the past decade has been quite dramatic. There are many factors that have contributed towards the growth of subprime lending. As a result, eventually it became a legal prospect. The capability to charge high prices and rates to borrowers was not considered to be feasible until a few of the vital laws such as the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) was adopted in the year 1980 (Chomsisengphet & Pennington-Cross, 2006).

The Causes of the Subprime Crisis There are number of severe causes that led to the crisis of subprime mortgage market. It has been eventually recognized as the combination of a number of factors in which subprime lending contributed a significant role for the crisis. One of the significant issues that led to the crisis actually began in the year 2001 with the bursting of the “housing bubble” that took place in the United States. A “housing bubble” is a financial bubble that arises in local or in a universal real estate market.

It is defined by rapid development in the evaluation of real properties in relation to incomes and other indicators of affordability (Bianco, 2008). The other root cause of the crisis among others that is related with subprime mortgage market is the factor of low interest charges. The mortgage rates that have been set eventually got affected by federal funds rates. As a result, the interest rates lowered down along with the increase of home values that ultimately paved the way for the crisis of mortgage market (Bianco, 2008).

The Subprime Fallout By the year 2005, the housing “bubble” that has been discussed above had eventually flourished along with huge increment in the federal interest rates. The foreclosures of homes that were purchased with subprime loans had risen drastically and there lay every possible chance to climb at a significant level. It has also been recognized that the lenders of subprime mortgage markets had declared insolvency and claimed significant losses. As a result, by the year 2007, particularly the US subprime mortgage industry did unfortunately collapse (Bianco, 2008).

After the subprime fallout, the range of victims continued to broaden. The homeless rates had been growing and the families continuously were losing their possessed homes. The renters had also suffered after the fallout as the owners faced foreclosures. In lieu of this, the financial analysts had cautioned that the state as well as the local governments would quickly experience the effects of the resulting decline in property tax revenue after the subprime fallout that has occurred (Bianco, 2008).

Conclusion As the subprime lending along with mortgage market has advanced over the past years, it went through with two historical distinctive periods. The first period was characterized by rapid growth and the second period was the downturn or the fallout of the market. The overall evidence shows that the subprime market has provided a considerable amount of risk based pricing in the mortgage market. A further investigation is necessary in order to find out certain remedial measures or solutions regarding the fallout and the unfortunate collapse of the subprime mortgage industry.

References Bianco, K. M. (2008). The subprime lending crisis: causes and effects of the mortgage meltdown. Retrieved from http://business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf Chomsisengphet, S., & Pennington-Cross, A. (2006). A brief history of subprime lending. Retrieved from http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf Federal Reserve System, (2007). What is subprime lending? Retrieved from http://research.stlouisfed.org/publications/mt/20070601/cover.pdf