Describe US subprime market and analyze the impact the crisis base on one macroeconomic - Essay Example

Banks than through their internal as well 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 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 the part of that phenomenon.

“Sub-Prime lending typically has been characterized as lending at relatively costly interest rates and fees to credit impaired or otherwise high risk borrowers.” (Lax, Manti, Raca, & Zorn, 2004). Subprime loans are among the newly popular mortgage products, such as interest-only loans, for people with strained budgets, including first-time buyers. Homeowners increasingly use them to refinance and consolidate household debts when their credit scores fall in the wake of bankruptcy, high medical bills, or other setbacks.

(Blanton, 2005). It is generally believed that the subprime borrowers emerge due to lack of the good credit history on their back and since there number grew historically therefore banks and financial institutions by spotting the opportunity started lending to them at higher interest rates due to the perceived risks involved in these subprime loans. Not only these subprime borrowers pay higher interest rates but they also pay higher upfront fees also at the time of booking their loans. Due to this profitable alterative, financial institutions take the risk and lend to those customers who would otherwise can not qualify for obtaining loans from the banking channels in the ordinary course of the business.

In nutshell, we can say that subprime lending is lending to those who do not deserve it. Most of the subprime lending is made into the mortgages market of the Banks. Studies suggest that So-called