Sub-prime lending has to be banned; no two ways for it

IIPM PUBLICATION

The once gravity defying escalation in the US housing market seems to be coming to an abrupt and screeching halt. But that’s just the outer crust; the real problem lies deep within something known as the subprime mortgage. And what’s that? Well, these are the mortgages based on blemished borrowers who have a credit record not suitable for obtaining conventional financing (in other words, they’re ‘sub-prime’ and less creditworthy).

Of course, the lenders charge the borrowers interest rates that are 4-5% higher than the market average because of the risky nature of the borrower. And truly, it all went on well until 2006. But the horror of it all was that the US housing market kept on ballooning with money sloshing in from the subprime market. As per a report published by Credit Suisse in March 2007, the subprime market dangerously grew about 400% to $665 billion in 2005 from $138 billion in 2000. Utterly malignantly, the Alt-A mortgage segment – a worse category of non-conventional loans, where a borrower is one with limited funds or a poor credit record (such as being 30 days delinquent once or twice in the past year), but with anticipated capacity to resolve outstanding credit issues – zoomed upto $400 billion in ‘06 from less than $50 billion in ‘02. It’s unbelievable but true that currently, these two segments make up a terrifying 40% of total mortgages.

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Surce : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative