…Subprime lending is a fancy, financial term for high interest loans to people who would otherwise be considered too risky for a conventional loan. These are people who may earn a middle-class income but who have accumulated too much debt, or poor and working class families who want to buy a home in the inflated housing market. To cover their risk, lenders charge such borrowers higher-than-conventional interest rates. Or they make "adjustable rate" loans, which offer low initial interest rates, which jump sharply after a few years.
Only a decade ago, subprime loans were rare. But, starting in the mid1990s, subprime lending began surging… Many of the lenders were legitimate operations providing a market for credit risky people. But there also were huge corporations, such as Household Finance International, that sought extraordinary profits through unsavory means called predatory loans. Not subject to government regulation, they bent the rules, lowered normal banking standards, and seduced many people - low-income as well as middle-income borrowers -into signing on the dotted line.
With interest rates remarkably low, housing prices on a nonstop rise, and practically no government regulation, mortgage finance companies devised high-interest, high-fee schemes to entice families to take out loans that traditional savings banks would not make. Mortgage brokers, often using mail solicitations and ads that shouted, "Bad Credit? No Problem!" "Zero Percent Down Payment!,” found the people closed out of homeownership and homeowners who could be talked into refinancing. Millions of families took out these loans... While subprime lending was concentrated in minority and low-income urban areas, it spread to the middle class suburbs.
These subprime lenders didn't hold onto these loans. Instead, they sold the loans - and the risk - to investment banks and investors who considered these high interest rate, subprime loans a goldmine. By 2007, the subprime business had become a $1.5 trillion-dollar global market for investors seeking high returns. The whole scheme worked as long as borrowers made their monthly mortgage payments.
When borrowers couldn't or wouldn't keep up the payments on these high-interest loans, what looked like a bonanza for everyone turned into a national foreclosure crisis and an international credit crisis. In the past year alone, more than a million families have defaulted on their mortgages and lost their homes, their only form of wealth. For these families, many of whom were middle-class families living in the suburbs, the American Dream of home-ownership became a nightmare...
Studies have shown that foreclosures increase violent crime in neighborhoods. Houses become vacant, deteriorate into eyesores and detract from the neatness and feeling of well-being in neighborhoods. Vacant houses attract crime and make it more difficult for neighbors to purchase homeowners insurance…