What are Subprime Loans or Subprime Mortgages?
These are loans or mortgages made to homeowners with poor credit ratings. Loans made to these people are of considerable risk because these borrowers are more likely to default on their loans since they already had financial problems before taking on the loan. After a subprime loan is issued to homeowners, issuing banks usually sell these loans to investors. To compensate for the high risk, subprime loans typically pay higher yields. Attracted by the higher yields, a number of mutual funds and hedge funds in the US invest in these loans.
