“The term subprime (also called nonconforming or non-standard) defines a specific lending market sector where borrowers are considered as posing a higher than standard credit risk (as revealed, for example, by their credit history) and that do not qualify therefore for the prime market.” (Turano, 2006)
Risks involved with the approval of subprime loans to lenders and borrowers were direct and catastrophic in their scope. Not only were the risks felt by borrowers and lenders alike, but the entire economic stability of the United States suffered shock waves that reverberate to modern day.
Borrowers endured through foreclosures that struck across the entire financial spectrum but the misery was felt primarily in the housing market. Additionally, those individuals with a mortgage foreclosure were also faced with the very real probability of having to file personal bankruptcies and remediating the negative effects to their credit ratings and the ability to borrow money in the future. Lenders laid-off thousands of employees and took massive write-offs of their sub-prime assets (homes & commercial properties).
To discuss the risks involved with subprime loans and the resulting financial crisis, it would be sophomoric to not discuss the combined responsibilities of the borrowers, mortgage brokers and lenders, securitizers, rating agencies, and investors. While the intent of regulators was to relax qualification standards, focused at low-wage earners, to afford them the opportunity to participate in the American dream of home ownership, the lack of reasonable consideration to approvals placed an inevitable anvil that dropped the financial markets into a crevasse yet to be fully reversed. “There are many beneﬁts to society of increasing home ownership as long as the ﬁnancing mechanisms are appropriate. Home owners build equity, take better care of their homes, and participate more in their communities.” (Gilbert, J., 2011)
A compounding, and secondary effect, was felt by borrowers and lenders when it was discovered that secondary and third-market buyers of these assets had been duped by the loan originators, who falsely elevated the asset values to make the bundled loans appear more valuable.
Gilbert, J., (2011), Moral Duties in Business and Their Societal Impacts: The Case of the
Subprime Lending Mess, Business & Society Review (00453609), 116(1), 87-107,
Turano, E., (2006), Subprime mortgage lending: recognizing its potential and managing its risks,
Housing Finance International, 21(1), 37-42