Subprime Crisis: Causes, Consequences and Prospects

Sub-prime loans are granted to persons unable to access market interest rates, because of problems in their past history as borrowers. Typically, these subjects are those with fewer credentials as precarious, pensioners, or immigrants. The sub-prime loans are risky for both creditors and debtors, given the dangerous combination of high interest rates, bad credit history that includes financial delinquencies and unclear situations. A significant datum is that in the United States since 1998 one loan in four is considered sub prime.
A sub-prime activity is defined as such for the state of the debtor. A sub-prime mortgage is, by definition, a loan to an entity that could not have access to a more favorable rate in the credit market. The sub-prime borrowers typically have a low credit score and credit histories composed of defaults, foreclosures, delays and bankruptcy. Typically they have low repayment capacity, as it is measured by credit scores and the debt/income ratio, or other criteria that define an incomplete credit profile. Generally, sub-prime borrowers have low income or a credit score below 620, on a scale ranging from 300 to 850. For this reason, sub-prime borrowers are considered at a high risk of insolvency, then the sub-prime loans are inherently less favorable conditions of other types of credit. These terms include interest rates, fees, and higher premiums. These loans, granted at higher rates, because of their increasing interest rates, led debtors to a situation of insolvency.
Proponents of sub-prime mortgages in the United States stressed the role of this type of credit that opened the market of credit to consumers who would cut off otherwise. But opponents criticized the credit sub-prime industry, accusing it of predatory practices, such as accepting customers who clearly lacked the resources required to meet the terms of contracts. Such criticism increased exponentially since 2006, in response to the growing crisis in the U.S. sub-prime mortgages market. Hundreds of thousands of borrowers were forced into insolvency, and many credit companies filed for bankruptcy. The sub-prime mortgages proliferated since the early years of the 21st century, reaching approximately 21% of the contracted loans from 2004 to 2006.
There are many different types of sub prime mortgages, including "interest only" loans (which allow borrowers to pay only the share interests for a certain period of time, typically 5-10 years), "pick -payment" loans (which allow borrowers to choose the type of monthly payment, including full payment, or share interests, or minimum payment that may be lower of the payment required to reduce the debt), or loans to "adjustable rate" (initial fixed-rate mortgages that are converted into time-rate mortgages). The latter class includes a vey popular type of loans among that grew exponentially since the early 90's.
While in the past banks used to take the risks of lending to their customers, today, thanks to a system of securitization bank loans are broken up, packed and shipped by special companies and other funds to other banks.
Since the end of 2006, the U.S. industry of subprime mortgages went into a catastrophe. An incredible rise in the default rate of subprime mortgages forced more than two dozen agencies into bankruptcy. The failure of these companies caused the collapse of their share prices, threatening the entire U.S. housing sector and even the entire U.S. economy.