Subprime Mortgage Tremors: An International Issue

By Lander, Gerald H.; Barker, Katherine et al. | International Advances in Economic Research, February 2009 | Go to article overview

Subprime Mortgage Tremors: An International Issue


Lander, Gerald H., Barker, Katherine, Zabelina, Margarita, Williams, Tiffany A., International Advances in Economic Research


Abstract The subprime mortgage crisis has negatively affected individuals, investors, lenders, and economies worldwide. This paper first examines contributing factors of the crisis: predatory lending, predatory borrowing and mortgage fraud, unethical practices, unregulated mortgage brokers, off-balance-sheet activity, and the infusion of capital from Asia that provided the fuel for subprime mortgage activity to continue. International markets have both suffered from and contributed to the crisis. Legislation that has been enacted or recommended in the U.S. and the European Union is reviewed. We then make recommendations which could begin to restore confidence of consumers and investors worldwide; however, it is clear that laws and regulations must be enacted quickly to correct the situation and bring stability to investment markets.

Keywords Subprime * Mortgage * Lending

JEL F30 * F39 * G10 * G15

Introduction

The current subprime mortgage crisis has caused much concern internationally as homeowners, lenders, financial institutions, and investors worldwide have felt the negative effects of the crisis (Greenspan 2007; Kuttner 2007; Bernanke 2008). A wide array of factors including but not limited to predatory lending practices, predatory borrowing and mortgage fraud, unethical practices, unclear or lax rules and regulations, and conflicts of interest have caused this international crisis. The various causes must be examined and understood in order to formulate protective measures against future occurrences.

Causes of the Subprime Mortgage Crisis

Predatory vs. Subprime Lending Practices

To begin, subprime lending practices must be defined and distinguished from predatory lending. Subprime lending involves loans offered at rates greater than the prime rate to individuals who do not qualify for prime rate loans due to poor credit and who therefore are viewed as high risk (Smith 2007), Subprime lending is viewed as ethical since it gives those with lower credit ratings the opportunity to obtain loans and mortgages--although at higher interest rates. However, as lenders apply unethical or illegal procedures to subprime loans, the classification changes from subprime lending to predatory lending (Bond 2002, p. 34). Predatory lending is abusive lending "targeting the elderly, people of low income, minorities, and individuals with limited understanding of financial transactions" (Bond 2002, p. 34). The predatory loan market is comprised not only of home mortgage loans, but extends to consumer credit cards, "payday" loans, rent-to-own loans, loans by phone, and loans solicited through the Internet (Bond 2002). As of 2002, the federal and state governments had not clearly defined predatory lending practices, nor determined penalties for engaging in it.

Predatory lending also includes offering subprime loans to individuals who qualify for prime loans. Fannie Mae estimated that up to 50% of the subprime refinanced loans could have been prime loans--saving the borrowers thousands of dollars in fees and interest rates (Christie 2007a, b). Minorities have also been hard hit as evidenced by a government study in an African-American neighborhood showing over 51% of the refinanced mortgages being subprime, compared to only 9% in predominantly white neighborhoods (Bocian et al. 2006).

In the early 2000s, interest rates were low and mortgage money was available, which helped raise real estate values across the country. With values escalating, lenders felt more comfortable making mortgages to customers whose poor credit histories had prevented them from buying homes in the past. As home values, rise borrowers are less likely to default since they can sell their homes and have enough to pay off the mortgage if they face financial hardship. That put more buyers into the market, helping to raise home ownership rates to a record 69% in 2004 (Arnold, May 5, 2008), which pushed housing prices to double digit growth in some areas. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Subprime Mortgage Tremors: An International Issue
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.