Running Head: SUBPRIME MORTGAGE

Subprime Mortgage

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SUBPRIME MORTGAGE

A subprime mortgage is a type of housing loan that is granted to borrowers who have

impaired credit history. In most cases, they have no credit history whatsoever that they can be

linked with. The credit scores that they have are so low that they are not capable of getting a

conventional mortgage with the score that they have is of 660 or below (Arentsen et al, 2015).

FDIC reports that these borrowers are in most cases experiencing bankruptcy, low income or

delinquency. The delinquency in their payment is about two to thirty days in their past years. The

lender of the loan had to write-off the loan in the past two years. The size of interest rate

associated with this type of mortgage is dependent on the four factors; credit score, number of

late payment delinquencies on the borrower's credit score, size of down payment and type of

delinquency that one has (Ashcraft & Schuermann, 2008). These loans are at higher risk of

default than loans to prime borrowers thus they are highly charged for the risks that the bank

indulges in.

The subprime market is very beneficial to the lenders since there is a high interest that is

associated with these loans (Ashcraft & Schuermann, 2008). When the borrowers pay the loans

the lenders make a substantial amount of interest since they charge more due to the risk that is

associated. Subprime market is beneficial to lenders since the market is less susceptible to

interest rate swings because borrowers do not have the option to refinance debt until their credit

rating improves. A wide use of this mortgage in banks can create a very big risk. The health of

the subprime market is dependent on the strength of the overall economy thus when people find

work and earn a decent wage, they are more likely to repay the debt. The weakening of economy

will lead to poor repayment and thus put lenders especially banks in large trouble of losing funds

from unpaid loans.

SUBPRIME MORTGAGE

References

Arentsen, E., Mauer, D. C., Rosenlund, B., Zhang, H. H., & Zhao, F. (2015). Subprime mortgage

defaults and credit default swaps. The Journal of Finance, 70(2), 689-731.

Ashcraft, A. B., & Schuermann, T. (2008). Understanding the securitization of subprime

mortgage credit. Foundations and Trends® in Finance, 2(3), 191-309.