Monday, September 10, 2007

Sub Prime Lending

Today I wanna buy a house for which I require credit from the market.But I am denied credit from the standard or prime mortgage market as my credit history is not acceptable as per the requirements.So what should I do? I know home ownership is one of the best ways to build wealth but I have been denied credit.Now I select the second option i.e. I go for subprime lending.
Here I have relaxed terms and conditions and lesser hassles.But all this at the same price?Obviously not.As we know there are no free lunches.The borrower is required to pay a handsome interest rate due to which sub prime lending is also called high cost lending.Because of sub prime lending we can have an increased number of house owners and an increased opportunity for them to create wealth.

How easy is it in the subprime market?

Let us see the major difference in the requirements in prime and sub prime markets.
Borrower cost associated with subprime lending is driven primarily by two factors i.e. credit
history and down payment requirements while in the prime market, borrower cost is primarily driven by the down payment alone, given that minimum credit history requirements
are satisfied.

But when you pay a higher price in the sub prime market you also expect higher rewards.It is a high risk high reward market.

Costs to the borrower

  • Upfront costs include application fees, appraisal fees, and other fees associated with originating a mortgage.

  • Continuing costs include mortgage insurance payments, principle and interest payments, late fees and fines for delinquent payments, and fees levied by a locality (such as property taxes and special assessments)

These costs are associated both with prime and subprime lending but they are higher or the latter.

Subprime Mortgage and US Recession

The subprime mortgage financial crisis in US spread to the world in 2007. Home owners were unable to meet financial commitments lenders were left with means to recoup their losses. This has led to a severe credit crunch, threatening the solvency of a number of marginal private banks and other financial institutions.
This has been cited as the reason for declines in stock markets worldwide, several hedge funds becoming worthless, and bankruptcy of several mortgage lenders.

For details on subprime lending visit

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