Sub-prime lending issue?

Over the last few years, banks were heavily involved in 鈥榮ub-prime home lending.鈥?Basically, they were giving away home loans that offered 100 percent financing, with no downpayment required, poor credit was not a problem and you didn鈥檛 need to verify income. As a result, many people with poor credit and unstable incomes rushed to buy a piece of the American Dream 鈥?a house.

Typically, these loans offered a low rate for two years (7.00% to 8.00%) with interest-only payments. After this, the rate would jump to 10.00 to 11.00% and so would the payments. People were told to spend the first two years concentrating on how to fix their poor credit records and to stabilize their household incomes. Unfortunately, many borrowers didn鈥檛 follow this advice.

Today we have a huge foreclosure problem as a result of this reckless lending over the past few years. How could bankers be so stupid? Where were the federal regulators? Why didn鈥檛 people see a financial planner or CPA before they made the decision to take on so much debt with questionable terms?


Please write a one to two page commentary on your impression of the sub-prime lending issue. However, please make sure that you list a few solutions to this massive problem. If you were the President of the United States or a congressperson, what would you propose to do? If you were a CPA or Financial Planner, what advice would you give your clients who are in this mess? I look forward to your responses on this hot issue of the day.

I will not be able to "write a one to two page commentary", however, I came across a very interested article about the type of loans issued. The basic idea seemed to be that adjustable rate loans with no allowed prepayment eliminate two major sources of risk for lenders (interest rate risk and prepayment risk), so in theory lenders should be able to offer these loans with good rates and thus pass on the savings to borrowers.