is the practice of extending credit to borrowers with certain credit characteristics - for example, Fico scored fewer than 620 - to the exclusion of loans to the prime rate (hence the term “subprime”). The subprime lending refers to different types of credit, including mortgages, car loans and credit cards. Since subprime borrowers often have poor or limited credit histories, are usually perceived as more risky than prime borrowers. To compensate for this higher risk, subprime lenders charge borrowers a premium. For mortgages and other fixed-term loans, this is usually a higher interest rate, credit card, in the upper limit or delay are also common. Despite the increased costs associated with subprime loans, which gives access to credit to people who might otherwise be denied. For this reason, subprime loans is a first step towards a “credit repair” to maintain a good payment history to their subprime loans, borrowers can establish their creditworthiness and eventually refinance their loans at lower rates, cousin.

The subprime loans became popular in the U.S. in the mid-1990, with the increase in outstanding debt of $ 33 million in 1993 to $ 332 million in 2003. From December 2007, there was an estimated $ 1.3 trillion in outstanding subprime mortgages. [1] 20% of all mortgages originated in 2006 were considered subprime a pace unthinkable only a decade ago. This substantial increase is attributable to industry enthusiasm: banks and other lenders who discovered they could make high profits of origination fees, the grouping mortgage securities, and sale of these securities to investors.

These banks and lenders cree that the risks of subprime loans could be managed, the belief that was fueled by steadily rising housing prices and the perceived stability of mortgage-backed securities. However, while this logic may have held for a short period, the gradual decrease of housing prices in 2006 led to the possibility of actual losses. As home values fell, many borrowers realized that the value of their house was surpassed by the amount owed on your mortgage. These borrowers started to default on their loans, which prompted housing prices in ruins and even more the value of mortgage-backed securities (because the underlying assets behind the titles are now worth less). This downward cycle created a fusion of the mortgage market.

The practice of subprime loans has widespread ramifications for many companies, with direct impact in becoming lenders, financial institutions and home building. In the U.S. the housing market, property values have plummeted as the market is flooded with homes, but no buyers. The crisis has also had a big impact on the economy in general, as lenders are hoarding cash or invest in stable assets such as treasury securities instead of lending money for business growth and consumer spending, which has resulted a credit in 2007. The subprime crisis has also affected the commercial real estate market, but not as much as the market as residential properties used for business purposes have maintained their long-term value.

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