• The subprime mortgage crisis was the outcome of lenders making loans to borrowers who could not afford the home they purchased. Subprime loans are loans underwritten for borrowers that have a credit score lower than 620. Borrowers are offered a low "introductory" interest rate, which lasts two to three years. At the end of the introductory period, the rate on the loan increases. The result can lead to an increase in home foreclosures due to homeowners not being able to bare the cost of their mortgage payments.Investopedia: The Fuel That Fed The Subprime Meltdown

• 1. Subprime is a type of loan for borrowers with low credit ratings
  2. Interest rates are higher because borrowers carry risk
  3. Usually given to those with a rating below 620
  4. Several types of subprime mortgage structures
  5. Most common is the Adjustable Rate Mortgage or ARM
  6. ARM offers a fixed interest rate
  7. Lenders freely granted these loans from 2004 to 2006 when lenders received profits and could charge above primeInvestopedia: What is a Subprime Mortgage?
  8. In 2008, the rate of home foreclosures skyrocketed and many lenders faced financial difficulty and bankruptcy

• Mortgage Crisis Timeline

  • 2005: The Federal Reserve increases borrowing costs to a federal funds rate of 5.25%MoneyCafe.com: Fed Funds Target Rate
  • 2006: Higher interest rates cause increased demand on subprime loans
  • 2007: Home sales experience a sustained downturnThe New York Times: Top Lender Sees Mortgage Woes for ‘Good’ Risks (July 25, 2007)
  • 2007: In August, Countrywide Financial Corp. comes close to filing for a Chapter 11 bankruptcy, but is bailed out by Bank of America
  • 2007: In September, Alan Greenspan states, "...the problem is that we've had a bubble in housing, and the bubble in housing essentially has roots, as I point out in the book, to the end of the Cold War, leaving aside all the economics that are involved."PBS: Greenspan Examines Federal Reserve, Mortgage Crunch(September 18, 2007)
  • 2008: In January, Countrywide is acquired by Bank of America
  • 2008: Bear Stearns is acquired by JPMorgan

Categories