Friday, August 17, 2007

What's the problem with US subprime lending?

Subprime lending is a highly controversial financial transaction.

Opponents have alleged that the subprime lending companies engage in predatory lending practices such as deliberately lending to borrowers who could never meet the terms of their loans, thus leading to default, seizure of collateral, and foreclosure.

Proponents of the subprime lending maintain that the practice extends credit to people who would otherwise not have access to the credit market.

Research by the Centre for Responsible Lending has predicted that one in five of the sub-prime mortgages made in the past two years will end in foreclosure, resulting in the biggest crisis for the mortgage market in modern times.

The centre said 2.2m sub-prime home loans had already failed or would end in foreclosure and that the losses to homeowners could be as high as $164bn.

Although the turmoil in the sub-prime mortgage market is nothing new, the most recent signs of stress at investment bank Bear Stearns have increased speculation that the Fed may soon have to cut rates.

But most analysts say Mr Bernanke and his Fed colleagues will want to see real signs of economic damage before they respond with cheaper money. For now, they think, the main danger to the US economy remains inflation.

No comments: