A subprime lender deals in what most people refer to as predatory loans. Basically, a subprime lender will offer loans to those who could not secure loans from a bank. However, the loans will be given with much higher rates of interest than normal. The term “predatory loan” arose from the fact that many lenders were making loans they knew would not be repaid. This would then give them the opportunity to seize a person’s home and other assets.
There are times when people simply do not have options. They need a loan and cannot get one from a bank. A subprime lender can help, but it is crucial for a person to understand what they are getting into before they make any deals. Not all subprime lenders are out to get people, but all of them are out to make money. It has been said that they simply charge each person as much as they can.
A History of the Subprime Lender
The subprime lender of today is actually a descendant of the loan shark. In the past, if a person needed money but either could not or would not look to a bank for help, a community based or outside loan shark would spot him what he needed for an agreed upon fee. Larger businesses saw that there was profit in this form of dealing, and they entered the fray. Things functioned pretty much as they always had, but now more money could exchange hands.
A major concern today is the involvement of banks in subprime lending. Many lenders who are backed by banks (most carry different names) can now give out high-interest rate loans as mortgage backed securities. This practice ensures that even more money will be returned to the lender. The methods of several subprime lenders are actually being questioned by congress. Concerned parties believe the lenders are breaking laws established in the Fair Housing Act, and others feel that some lenders operate in a way that could be conceived as prejudiced, charging far higher rates for minority borrowers.
Column on the Crisis surrounding the lending industry. News on Subprime Mortgages at Business Week Online.
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Oh, yeah. That's why so many lenders were willing to lend money to marginal borrowers...the real money was being made on selling the mortgages.
I don't know if "systems related slippage" is a high falutin' financial term but what came to mind was the situation encountered by some friends. Their mortgage was bought by another bank a few years ago. The new bank continued to charge them escrow payments to pay for their hurricane insurance...but neglected to pay the insurance company. When a hurricane came in 2004, their roof was blown off and their house fairly ruined with $80,000 worth of damage. The insurance company said "what insurance?" and the bank said "oops" but wouldn't pay. They're in litigation. In the meantime, they had to refinance their house to the tune of $80k just to get the repairs made so they could move out of the FEMA trailer in their back yard. Systems related slippage indeed.
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Subprime and the Real Estate bubble