Question: What are subprime loans?
Answer: Subprime loans are loans that are given to borrowers who have less than good credit ratings, modest income, or who are burdened with high debt and are unable to qualify for prime conventional loans.
Question: Why do lenders approve subprime loans?
Answer: Subprime loans have always been around. Initially called hard money loans, they were given to people who wanted to buy property or to borrow money on property that they already owned, but didn't have the necessary down payment or credit rating to obtain loans with favorable terms given by prime loan banks and mortgage companies.
Question: Why did the subprime loan market take off the way it did?
Answer: After the 9/11 attack, the United States economy went into a nosedive. One of the ways to stabilize the economy was to lower interest rates and get the housing and stock markets going in the right directions. There were large numbers of people who wanted to buy homes but could not get favorable financing based on the underwriting guidelines that were used by the prime loan mortgage companies so lending guideline were relaxed and the subprime lending craze took off.
Question: Who were given subprime loans?
Answer: Subprime lending opened the door to home ownership for many Americans who probably would not been able to buy otherwise.
Question: Who are the subprime lenders?
Answer: Until 9/11, the subprime lenders were institutions that dealt almost exclusively with people who did not have perfect credit or lots of money. After 9/11, many of the larger, well known, prime loan mortgage companies and banks, that were historically conservative in their lending practices, got involved in the subprime market.
Question: Why did prime loan mortgage companies and banks get involved with subprime lending practices?
Answer: Competition and greed. Huge amounts of of money was being made by underwriting subprime loans so many banks and mortgage companies all but abandoned their prime loan guidelines.
Question: Aren't there rules and regulations in place controlling the lending practices of mortgage companies and banks?
Answer: Yes, but for some reason, the government was slow react to the escalation of fraud and abuse that took hold.
Question: Then what happened?
Answer: Once the greed set in, subprime loans were given to anyone who said they made enough income to buy the property that they wanted. The lenders didn't bother about verifying the income or, or in many cases, the borrowers credit history either. The lenders just made the loans irregardless of the outcome, both to the borrowers and to themselves.
Question: Are a lot of people going to lose their properties?
Answer: Yes. All over the country, the numbers of foreclosures are climbing daily and so are the number of bankruptcies. The Federal Government has finally decided to step in to try to get a handle on what some are calling a looming disaster.
Question: What about the mortgage companies and banks? Are they going to survive the aftermath?
Answer: The government has put a halt to most of the subprime lending activity. Some mortgage companies, both large and small, have already gone out of business or are hurting very badly. Some of the largest and most well known mortgage companies in the country are in the news almost daily reporting losses and layoffs. This scenario will probably get worse before it gets better.
Question: Is the news all bad?
Answer: No. There is little doubt that the crisis in the housing market is bad, but like everything else, the United States is a country that bounces back from all adversities. It may take some time, but the housing market will straighten itself out and make a solid rebound.