What are Subprime Mortgages?
These are Mortgages made available to those of subprime credit risk (poor credit histories), hence called sub prime mortgages. Why would financial institutions lend to people with poor credit histories? The lending occurred during the property boom, the longer it went on the more lax the rules for lending become, as has happened during past property booms. Property seemed like a one way bet and therefore lenders could charge poor credit risk customers more interest and fees in securing the mortgages. Whereas if the borrower failed to pay the loan then the lender could foreclose and sell the property at a profit and thus there was little perceived risk in the market place. Where did the money come from? 1. Low Interest rates – The world was and still is to some extent awash with cheap money due to historically low interest rates, this enabled lenders to borrow at low interest rates and loan out at much higher interest rates. 2. Fractional Reserve Banking and the Money Supply – Basically
