“Subprime is Wall Street’s euphemism for junk.”
--Andy Serwer and Alan Sloan, How Financial Madness Overtook Wall Street, Time, Sep. 18, 2008
There might be hundreds of mortgage plans advertised on TV. However, the basic difference of them is whether it has a fixed interest rate. The subprime mortgage, for example, is the loan that has adjustable interest rate. Because it has an adjustable interest rate, people can delay paying loans as long as they want, and some even abandon the house so they don’t have to pay one cent. That’s where defaults come from.
“Risky mortgage products, not risky borrowers, are the root cause of the mortgage default crisis,” according to findings from University of North Carolina at Chapel Hill’s Center for Community Capital. That means the main factor of the mortgage crisis is subprime loan. There are more default cases because subprime loan has an adjustable interest rate. The study compared subprime mortgage with another lending corporation CAP, and got the conclusion that “Borrowers with comparable characteristics who had subprime loans were three to five times as likely to go into default as those with CAP loans. CAP stands for Community Advantage Program which helps middle and low income families with affordable loans. According to Center for Community Capital, if we return to traditional affordable loans just as Chinese lending system, things will straighten up.
It can’t be denied that some people are spending beyond their earning, and subprime mortgage gives them the incentive to default. However, we should think of the other side of people who really need the subprime mortgage. We should think about those middle or low income families who couldn’t afford houses. Do you still think subprime loan is evil?
What’s your reason for wake up in the morning?
6 years ago
2 comments:
I still don't fully understand how a subprime loan works. It seems to me like you buy a home with a mortgage with a fair interest rate and then after X amount of years the bank can adjust this, meaning increase it by X percent. At the end of your blog you state that low income families need subprime loans. Why? And i don't think that these loans are evil but, i also don't think that a lot of people actually understand what their getting themselves into.
Subprime loan is different from fix-rate loan because subprime loan doesn't require a lot down payment, some even requires zero downpayment. So it is a benefit to low-income families. They don't have to have a great amount of money to apply for a loan. Government can adjust these kinds of loans. For example, "pay option" loans and "hybrid mortgages" all have adjustable interest rates.
It's true a lot of people were deceived by mortgage companies into this crisis. That's why we need more oversight from government.
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