ecn102-subprimemortgage - The Sub-Prime Lending Crisis The...

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The Sub-Prime Lending Crisis The sub-prime crisis that we are now dealing with has come about from risky decisions from all across the financial market that has culminated to create an absolute mess. We have seen hints of looming problems for over a year now but it is only until recently that the true extent of the damage has been seen, and subsequently we are all starting to feel the effects. The crisis has caused the dollar to fall even lower and has helped to drive the prices of raw materials especially oil even higher. Therefore the issue has transcended from large firms and direct investors to the everyday consumer. We will all feel its burden for the next few years at least. Firstly we must give some background on the situation. A sub-prime loan or mortgage in this situation is a loan made to those who do not qualify for normal market rates, this is based mostly on poor credit history, therefore these loans are naturally riskier then their counterparts. Adjustable rates usually follow for these sub-prime applicants as well, making the strain greater as time goes on. While this is a fine practice in small amounts, brokers looking to keep the housing boom rolling steadily lessened the requirements for their loans and over time made these mortgages increasingly risky. Yet in the economic boom of the past few years the risk and warnings were ignored as companies searched to make even more money while times were good. Firms made profits through a CDO (Collateralized Debt Obligation), which were
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This note was uploaded on 04/16/2008 for the course ECN 102 taught by Professor Coughlan during the Fall '07 term at Salve Regina.

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ecn102-subprimemortgage - The Sub-Prime Lending Crisis The...

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