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Real Estate Market Crisis - Term Paper Example

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The author of the paper describes the current state of the real estate market which is a result of inappropriate lending practices and fraud which has and continues to force many homeowners to simply walk away from the “American Dream”. There are many players involved in this whole process…
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Download file to see previous pages Getting consumer credit through various financial institutions especially banks requires consumers to maintain a certain degree of credit rating in order to qualify for those loans. Unlike large corporate companies, consumers or rather individuals pose a different challenge and dynamics to financial institutions to cater to their needs for credit and formal funding requirements of these individuals. It is because of this reason that various banks and financial institutions have developed their internal rating methodologies which they assign to various consumers asking for credit. Banks than through their internal as well as external credit scores or ratings decide to whom they should provide the credit. These criteria of credit rating often are designed to be tough since Banks in order to avoid defaults, tighten their criteria to extend the credit to these customers. However, due to the increasing needs of those customers, whose credit history or their credit ratings do not fall under the criteria laid down by the banks, banks try to accommodate them also. Sub-prime lending is part of that phenomenon.

A subprime lender provides loans at higher interest with inappropriate incentives to the high-risk borrower. Ideally, a subprime lender is one who lends to the borrowers who do not qualify for the loans from mainstream lenders. This is because of the fact that those borrowers who have a bad credit history. A subprime lender is mainly an independent entity or the sub-entity of the main players in the markets. However, the only way to identify the lenders who lend to the subprime borrowers is to judge from their prices as they are normally higher than the prices charged by the normal lenders with standardized terms and conditions in the market. A subprime lender generally lends following types of loans:
i) Interest Only Loans are the loans that give the borrower an option to pay interest on their loans only; thereby Principal remain unchanged and at the end of loan term payments increase substantially. ...Download file to see next pagesRead More
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