The Sub-prime Mortgage Market and Variable Rate Mortgage Market in the Essay

The Sub-prime Mortgage Market and Variable Rate Mortgage Market in the USA - Essay Example The subprime mortgage market can be considered as an extension of this lending practice prevalent in the housing market. Subprime mortgage loans carry interest rates much higher than the prime loans in order to cover the additional risk exposure of the lenders in extending credit to the borrowers who are considered to have a bad loan track and defaulters in repayments. With the increase in the subprime lending the rate of failures has also considerably increased, as most of the loans have been granted to those who did not have the adequate means to repay the loans. When such failures have reached a greater proportion, "Investors have started scrutinizing subprime loans more carefully and, in turn, lenders have tightened underwriting standard". Certain other measures including credit spreads over subprime securitizations have also been undertaken to control the rate of delinquencies. Different aspects of the subprime mortgage including the variable rate mortgage are discussed in the following sections of the report. The report also details the process of securitization being adopted by the mortgage originators to fund the growth in their mortgage lending. 2.0 What is Subprime Mortgage Although the term 'subprime mortgage' is used to indicate the loans offered to those borrowers whose credibility is doubtful, the term "subprime' does not signify the character of the loan itself but characterizes the borrower meaning the borrower has a substandard credit status. Lack of good credit history and habitual defaults in repayments make the borrowers to get into the status of sub prime borrowers. Subprime lending can take a variety of instruments like... As the report declares the subprime mortgage market can be considered as an extension of this lending practice prevalent in the housing market. Subprime mortgage loans carry interest rates much higher than the prime loans in order to cover the additional risk exposure of the lenders in extending credit to the borrowers who are considered to have a bad loan track and defaulters in repayments. With the increase in the subprime lending the rate of failures has also considerably increased, as most of the loans have been granted to those who did not have the adequate means to repay the loans. When such failures have reached a greater proportion, â€Å"Investors have started scrutinizing subprime loans more carefully and, in turn, lenders have tightened underwriting standard†. This paper stresses that lack of good credit history and habitual defaults in repayments make the borrowers to get into the status of sub prime borrowers. Subprime lending can take a variety of instruments like subprime mortgages, car loans and credit cards. The expansion in the sub-prime mortgage has made the home-ownership possible for those borrowers who otherwise would not be able to qualify for any borrowing. There has been a sharp increase in the subprime mortgage in the recent years. With the increase in the subprime mortgage market, the concerns over the adverse effects of the predatory loans have also increased.