The Value of Subprime Mortgage - Essay Example

ot address prime mortgages, prime mortgages “are typically made to borrowers who have a strong credit history and can demonstrate a capacity to repay their loans.”2 On the other hand the term “subprime” is generally classified as mortgages or loans made to borrowers with an undesirable or elevated credit history or loan to borrowers with desirable credit history that “exceeded the property value”3 In such a case the borrower is typically charged with a higher interest rate and “up-front and continuing cost”4 in order to balance the risk associated with the likelihood of delinquencies or even foreclosure.

5 In the article Prime Mortgages -Think Twice the writer, Michael Challiner points out that the subprime market accounts for over 4000 types of subprime mortgages. Furthermore, Challiener emphasized that the subprime “mortgages are extremely complex, higher fees tend to be charges, the amount lent compared to the value is likely to be lower and the interest higher than in the rest of the mortgage market.”6 The rapid growth of subprime mortgage loans began in the late 1990s.7 The growth was a result of the three pieces of federal regulations.

First in 1980, Congress enacted the “Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980" under Title V which preempted the interest rate cap.8 Two years later in 1982 the Alternative Mortgage Transaction Parity Act (AMTPA) was enacted which provided for flexibility in the use of “interest rates and balloon payments.”9 By 1986 another law emerged this time the Tax Reform Act (TRA) which “prohibited the deduction of interest on consumer loans, yet allowed interests on mortgages for a primary residence as well as one additional home.

”10 As such, the late 1990s regulations show the emergence of the subprime market into the “wider capital markets as it rapidly secured a place in both the home purchase and home equity mortgage market.”11 This paper examines the