Which of the following is/are true about the Sub-Prime Crisis?

1) It is a mortgage crisis referring to credit default by the borrowers.

2) Subprime borrowers were those borrowers who were rated low and were high risk borrowers.

3) This crisis originated because of negligence in the credit rating of the borrowers.

Solution

Explanation: A type of home loan extended to individuals with poor, incomplete, or nonexistent  credit  histories. Because the borrowers in that case present a higher  risk  for lenders, subprime  mortgages  typically charge higher  interest  rates than standard (prime) mortgages. The most common type of subprime mortgage contract offered in the United States is the adjustable rate mortgage (ARM), which charges a fixed interest rate for an initial period and a floating interest rate thereafter. The floating rate may be based on an index such as the  federal funds rate , which is the rate at which  banks  lend money to each other overnight. The sharp increase in  subprime lending  that occurred in the United States beginning in the late 1990s was primarily fueled by subprime mortgages. According to the  Federal Reserve , the share of subprime mortgages among all home loans in the country increased from about 2.5 percent per year in the late 1990s to about 15 percent per year in 2004–07. One reason for the increase was aggressive marketing by mortgage brokers, who were paid commissions on the basis of the quantity, not the quality, of the loan contracts they sold.