Subprime mortgages are defined as type of mortgage which is normally made out to borrowers with lower credit ratings. As a result of borrower’s low rates of credit rating it leads to a conventional mortgage which actually comes in since the lender tends to view the borrower as having larger than average risk of defaulting on the loan. Lending institutions therefore often charges more interest rates than conventional mortgage as way of compensating themselves for carrying more risk.
Subprime mortgage loans are more riskier since they are normally made to the borrowers (Jonathan, 2003). Additionally, these loans are seen to be more riskier given the fact that they have a high interest rate hence the chances of a customer defaulting is very much high. Subprime lending therefore can be seen as new market which is currently growing at an alarming rate with growing pool of credit borrowers.
Homeownership is considered one of the primary ways of creating wealth in a particular economy. This implies most investors find it hard to invest in other investment which is not their homes. Since homeownership is considered to be a significant economic factor it led to the development of mortgage market. Subprime mortgage lending therefore is a market which evolved as a result of increased demand in the marketplace for loans due to high risk borrowers with imperfect credit (Jonathan, 2003).
The first subprime was developed in the year 1993 at a period in which many companies entered in the market at period when prime interest rates were low a situation which made the real interest rates to become negative hence allowing many subprime rates to grow. This therefore led to the development of subprime mortgage institutions where individuals who borrowed more earned more. Given the fact this market is characterized by complicated nature, it is market which is viewed as having great promises and great peril.
Subprime mortgage market is normally characterized by high levels of interests rates . This indicates that these loans are associated with greater default risk. Given the fact that most of these loans have high risks of defaulting they lead to high levels of financial crisis as some individuals often default the loans making particular financial institutions to suffer credit crunches (John & John, 2008).
John, B. , and John, F. (2008). Subprime crisis: United States: Chicago: Macmillan Jonathan, J. (2003). The causes of the credit crisis. London: Sage