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Who is to blame for the subprime lending fiasco?


The subprime lending fiasco began in 2006; by 2008, the amount of money lost because of people defaulting on their loans reached $250 billion [source: Rose]. In addition to all of the foreclosures, the country suffered a financial meltdown; subprime mortgages had been used for complicated investments and suddenly there was no money to back them up. A number of factors contributed to the subprime fiasco, including unscrupulous behavior on the part of mortgage brokers, unemployment rates and poor decisions on the part of borrowers.

Before the increased popularity of subprime lending, when people wanted loans, they'd go to the bank and work out the terms. But when mortgage brokers gained popularity as go-betweens, the industry lost some of its control over its lending power. And because mortgage brokers didn't lose anything when a borrower defaulted on his loan, they had no reason to turn away applicants. They earned their commission either way. In addition, many accusations surfaced that the mortgage brokers and lenders took advantage of minorities in order to make a few bucks. Statistics show that in 2006, 53 percent of blacks had subprime mortgages, compared to 17 percent of whites [source: Federal Reserve]. Plus, even when credit ratings were identical, blacks were 31 to 34 percent more likely to be quoted a higher interest rate than whites [source: CRL].

The unemployment rate factored into the subprime lending fiasco because people who'd planned to refinance their loans to make them feasible couldn't in light of the lethargic housing appreciation rates. Without refinancing, borrowers were unable to make the high payments after the loans' introductory periods. Obviously, part of the blame for the fiasco falls on the borrowers themselves; they failed to read the terms of their mortgages and took risks on loans they just couldn't afford.

 

 

 


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