How does Subprime lending negatively effect the economy?
I am writing a research paper in my macroeconomics class. I had to pick a current event and Subprime lending is it. I am not asking you to write my paper, I just need some help getting started I cant find any information on this topic. Please list where your info comes from. Thanks in advance!!
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Subprime incorporates excess risk into a loan. When those loans blow up, the banks who can no longer recoup their loan nor sell the asset are left at a loss. Too many losses and the bank goes belly up. Too many banks failing and they will all fail. And when that happens, everybody suffers.
The people who fall into SubPrime shouldn’t be getting a loan in the first place. They should remain renters until they can save up 20% of the cost of a house. And that house better not exceed their ability to pay for it. Which is usually monthly payments that do not exceed 28% of their income.
When democratic President Jimmy Carter signed the Community Investment Act into law, he forced banks to give loans to poor people who couldn’t make their mortgage payments.
This sort of fiscal engineering rather than free market economics obviously has nothing but negative effects on the national economy.
Since it is mandated by law that a bank give a pauper a mortage exonorating the lender from any legal malfeasance, then it follows that you will seek out all the poor people you can find, give them loans, get promoted for meeting your quota as the loan officer, and walk away from a problem in the making. And it reasonably follows that as a large group of poor in America are black, you target this group for sub-prime loans, make your quota, get promoted and move on. And its all perfectly legal!
But if its legal, it can’t be wrong?