What Is Subprime Mortgage
Subprime mortgage that happen in United State had caused the world economy in depression since fourth quarter in 2007. So what subprime mortgage is? Let us go deeper inside to know more about it.
Obviously, subprime mortgage is related to property sector. Subprime is a classification for a borrower with lower credibility and mortgage is lender’s security for a debt given to borrowers. Subprime mortgage can means lending money to borrowers with lower credibility and in return they use property as mortgage. Even a child will know that don’t lend money to low credibility friend but why does adults or big company tend to believe those people by lending money to them.
This is the whole scenario of subprime mortgage crisis:
Mortgage broker lend the money to borrower with lower credibility. Then the broker sells the mortgage to a bank which in turn again the bank sells the mortgage to investment firm. The bank and investment firm every month receive cheque from the repayment of the borrower. The investment firm fulfill the demand of investor outside by selling shares of the income or mortgages backed security.
Mortgages backed security is most investor favorite as it is stable. The problems arise when the qualification of getting loan is looser and looser. Even those without stable income also able to borrow money from mortgage broker as long as they want to borrow. The bank doesn’t care much about the background of borrower as they are selling the mortgage to investment firm.
All the things go so well if the borrower able to repay their debt. However, most of borrower with low income start to struggle paying back the loan and some even default it. When all borrowers facing problem of paying back, the investment firm also facing problem with the security issued. Investor start nervous and sell all the shares or bond they have.
The subprime mortgage crisis which occur in 2007 had affected all the investor all over the world. Things might repeat in the future as human is always greedy, so better learn from the history.
It is good to know more and deeper about subprime mortgage related investment now. However, it it even better to know about it before you even invest into it. In fact, it is always the best investment practice to understand what you invest into. How much is your risk exposure? What are the charges (both disclosed and hidden)? How does the investment deliver the investment it promise? etc,.
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There are many people we can blame in this financial crisis. Bank’s willingness to lend money to poor rating borrower, borrower refinanced the house and took up a larger debt betting for rising home price, fed’s ever lowest interest rate since dot com bubble. Investment firms who vowed not to stop packaging the CDO. Rating firms gives triple A to CDO in order to win business from firms. All this added up to become a big disaster. But in retrospect, it was too good of a picture – ppl making money, ppl feel richer, and no one was willing to stop.
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