Essay: Sub Prime Loans

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Essay: Sub Prime Loans

Sample Essay

Subprime loans were increased by interest only loans where by a borrower was allowed to pay the interest only and leave the principle. This arrangement was working out well until the when interest was raised meaning the homeowner could no longer service his loan. This meant that there were too many houses to be sold by the lenders, which led to low prices due to increased supply. As more loans proved to be bad debts, many houses were taken over by the banks. The banks acquired so many homes such that it became difficult to sell the houses since there was less demand than the supply for it meant selling them at a loss.

By this time, subprime mortgages had been used as collateral to stocks in the stock market. The fact that the subprime mortgage had been incorporated in the stock market spread the mess in to the economy in the U S and the rest of the world. The secondary is when these repackaged subprime mortgages were traded with investors. If there had been no this secondary market then banks would have had the responsibility of taking care of the loans they were advancing. This would have to lead more serious vetting before approving the loans hence there would have been lesser bad loans. The banks had been given the opportunity to lend to high risk end customers without taking responsibility of the future happenings. When it became difficult for the homeowners to sell their houses and having no chance of negotiating with their banks because the facility had already, being sold there was no alternative other than to default the loan.

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