A Note On Subprime Loans

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Recent mayhem in the American economy attributed to a weakening of business regulation. In the absence of oversight, lending became a wildcat enterprise. Mortgage brokers easily deceived home buyers by promoting subprime loans, and then they passed on bundled documents to unwary investors. These subprime loans were offered at a rate above prime to individuals who did not qualify for prime rate loans. The loans were made to people who had no other way to access funds, and little understanding of the mechanics of the loan. A scholarly document on subprime lending by Hanif NuMan warns, “Servicing prime and alternative- A (not subprime) loans, the automated underwriting systems were designed to the specifications of banks and financial institutions, and utilized by loan originators to originate more loans as well as develop a database for the respective entities” (NuMan). Subprime loans by and large were issued without regard to what would happen if the borrower could not repay the loan. Subprime loans commonly have adjustable rates that have monthly payments that will dramatically increase two years after receiving the loan. Subprime loans were usually classified as those where the borrower had a FICO score below 640. Subprime loans can be based on credit scores alone. On the homeowner’s home loan application subprime loans would have the option to use a stated income or even no income or asset verification at all. Special terms usually accompany subprime loans, for example,
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