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Subprime Lending in a Nutshell

Posted on | October 27, 2008 | 4 Comments

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Subprime lending is a financial term used to describe financial institutions providing credit to borrowers who are deemed risky or “underbanked” due to financial restrictions.  Subprime borrowers are often slapped with higher loan rates as they are at a higher risk for loan default.  Subprime lenders take on extreme risk as they are lending money that might not be paid back.

The above situation is exactly what caused the “Subprime Crisis” of 2007.  Mortgage lenders had been giving money to risky individuals for over a decade and when the economy started to go south, the “at risk” borrowers could not pay back their commitments and had to default.  One lender falling lead to another which has created the current market condition we are currently in.  Subprime lending ultimately lead to the troubled economy we are in today.

There have been many ideas as to how to get out of this situation, but the best way is to let the financial institutes default, just like the borrowers they approved and let the economy “flush” itself out.  What are your reactions to this idea?

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Comments

4 Responses to “Subprime Lending in a Nutshell”

  1. Danny Thornton
    October 28th, 2008 @ 3:26 am

    Actually, I have to say I really do not agree with this assessment at all. Subprime Lending is not what caused the Crisis that we are currently in. What people do not understand about today’s crisis is that it is not just Subprime that is defaulting.

    There are many components that make up the reasoning to the current crisis. One would be the “Stated Loan” and another would be the “ARM”, or Adjustable Rate Mortgages.

    The thing that people do not realize is that conventional loans are tanking just like subprime loans. It is just looked at that the Conventional is a smarter product that the Subprime.

    Bottom line is no matter how you slice it, we would not be in the current crisis if people had of bought a little less house and qualified for the future and not the present.

  2. Lao Tzu
    October 30th, 2008 @ 10:15 pm

    I am not sure if I totally agree. This was one cause, but there was also a huge increase in house prices in major cities in 2006-2007 as people flipped houses for big profits. House prices roughly doubled in less than 5 years. I think this was also a big factor that no one seems to be talking about. It’s easy to say people defaulted on their loans, but when they have higher interest rates and overpriced houses, is it really their fault. People need a place to live.

  3. admin
    October 31st, 2008 @ 9:12 pm

    I would agree there are many causes, I should have worded the analysis a little bit differently. Sorry guys!

  4. Subprime Blogger » Financing Subprime
    January 15th, 2009 @ 12:22 pm

    [...] Subprime Lending In A Nutshell [...]

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