US Subprime Mortgage Market (A): Financial Innovation andWelfare Effects
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Code : ECC0028
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Region : US |
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US Residential Mortgage Market Emergence of American residential mortgage market can be divided into three basic phases. In the first phase (till 1930s), mortgage loans were generally originated and held by the lender. In this era, most mortgages were made by a seller of land to help the buyer acquire title. Mortgage lending by financial institutions included co-operative building societies, savings banks, private mortgage lending firms, some insurance companies and so on... Subprime Mortgage Industry Structure The process of creating, financing,marketing and servicing amortgage loan relies on the successful completion of several distinct business functions: Origination The first stage of the market involves the people who interact directly with customers (potential homebuyers or borrowers wishing to refinance) to originate a loan. According to the MBA's Subprime Mortgage Originations Survey, 71%of the subprime loans are broker-originated.21 The market participants who play the role of brokers are wholesale originators... |
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Characteristics of Subprime Mortgage Subprime mortgage characterises loans to homeowners with a history of poor credit, usually persons with FICO scores23 below 620. The spread between the average prime and subprime rate has remained at approximately 200 basis points.24 In addition to having lower FICO scores, subprime borrowers typically have a Loan-To-Value ratio (LTV)25 in excess of 80%.
The Challenges and Welfare Effects Subprime mortgage market innovations has elicited some concerns about their implications for the stability of the financial system, concerns similar to those associated with earlier periods of rapid change in financial markets..
