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How the Financial Crisis Began?
Basically, subprime mortgages are those mortgages issued out to consumers having less qualifying requirements. This includes those consumers who have bad credit and are not able to secure mortgages on the prime market. Compared to prime mortgages, subprime mortgages charge higher interest rates with the bulk of them being Adjustable Rate Mortgages (ARMs) which allow the lender review interest rates from time to time based on the prime rate.
In a bid to increase credit available for consumer lending, the securitization of financial assets for which there is no secondary market gathered pace in the mid-1990s. From this, mortgage backed securities (MBS) consisting of large pools of mortgages upwards of 1,000 individual mortgages were combined and sold to investors. This practice became favorable to banks as it made more funds available without having to recapitalize while debt and risk initially tied to the bank shifts over to the investor.
From an investors’ point of view, the potential of earning sizeable profits was encouraging and considered by big-money investors like pension companies, and hedge funds as a viable investment opportunity.
Similar Posts:
- Vicious Cycle that led to the Financial Crisis April 2, 2009
- Understanding How Bailouts Work August 13, 2009
- Second ‘$800 billion’ Bailout and It’s Affect on US Consumer Banking December 17, 2008
- Laws to Prevent and Counter the Financial Crisis April 15, 2009
- Getting Ready For a Crisis August 14, 2009
- New Credit Card Rules Effective August 22, 2010 June 28, 2010
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Just came across your website from Yahoo. Well written, a pleasure to read it
Excellent article, Just forwarded this on to a friend who read up on this and she took me to dinner after I forwarded her this blog. So, Thanks!!