Sub Prime Crisis

5863 WordsFeb 6, 201324 Pages
THE SUB-PRIME CRISIS OF 2008 INTRODUCTION The word meltdown no longer applies to just nuclear reactors, unruly toddlers or Popsicles and is extended to sub-prime as well. The sub-prime mortgage crisis was a slight tremor that turned into a disaster, threatening to plunge the U.S. economy into its worst recession since the tech bubble in the early 2000s. The only consensus on the issue of who caused the financial sub-prime crisis of 2008 has been that there were many who did. In the instance of sub-prime mortgage woes, there is no single entity or individual to point the finger at. Instead, this mess is a collective creation of the world 's central banks, homeowners, lenders, credit rating agencies and underwriters, and investors.…show more content…
A sub-prime mortgage thus can be understood as a mortgage which is offered to borrowers with low credit ratings or some other characteristic that increases the risk they will default, or fail to make their monthly loan payments. This is because a sub-prime mortgage can offer a consumer a way to purchase a home while they repair or build their credit history. Because subprime mortgages carry substantially higher interest rates than similar mortgages available in the prime mortgage market, a subprime mortgage borrower has a great deal of incentive to repair or establish his or her credit to be able to refinance the subprime mortgage into a prime mortgage. Most sub-prime loans start with a low ‘teaser’ rate charged for the first one to three years. After completion of three years, the rate is reset by adding a set number of percentage points to a base rate, such as market driven rates on certain bonds. Starting in 2005, resets caused monthly payments for many sub-prime borrowers to increase by 50% or more, leading to a rising rate of delinquent payments and home foreclosures. Many sub-prime mortgage programs have been designed and intended to be relatively short-term financing vehicles. Adjustable-rate mortgages (ARMs) with either a two-year, fixed interest rate period (2/28 ARMs) or a three-year, fixed interest rate period (3/27 ARMs) are common sub-prime mortgages. They are non-conforming mortgages which do not meet the standards for
Open Document