The risk of sub prime loan and what measures have been taken to deter this from occurring in the future?
The risks of subprime loan to the lenders indicated that lenders have higher delinquency rates compare to standard prime mortgage. Beside higher delinquency rate, the lenders also have higher loss rate risks. The combination of high delinquency rates and high loss rates caused the lenders out of businesses because they could not manage the loss. American Psychological Association (2010) a number of institutions have incurred significant losses and other problems because of poorly structured subprime lending program. Generally, these institutions underestimated the higher default rates and loss on default rates involved with subprime lending as well as the higher overhead costs. Moreover, they frequently lacked the management expertise, business planning processes, and risk management processes necessary to manage these risks in a safe and sound manner (Turano, 2006)
With the overall financial crisis of 2007-2008 which indicated what went wrong and how to prevent anything like that from happening again. In response to the problem in subprime loan, the government already took several steps to provide limited relief to deter foreclosures and allow those with good credit opportunities to refinance and adjust payments to keep their homes and stay current on their payment. Politician and financial regulators tightened lending rules to offset the incentive created by mortgage-backed securities and prevent loans from being issued to people who are unlikely to be able to make the required monthly payments. (p.23) they also passed legislation to help homeowners who were underwater on mortgage loan remain in their home. The Wall Street Reform and Consumer Protection act was passed by Congress and signed by president Obama in 2010. (p.811). this act regulates the following: