What’s the big deal with subprime loans?

In order to understand the impact of subprime loans, it is necessary to understand the goals that drive the economy. In this blog we cannot cover the full gambit of measures that drive the economy, so for the purpose of this blog we will focus on home ownership. One of the ways the government strives to grow the economy is through home ownership for moderate to low-income families (Avery, & Brevoort, 2015). This benchmark goal set in to motion loans for mortgages with people who were not financially in a position to actually purchase a house. Many of these people were considered a high credit risk. Many were either not making the actual income they claimed in order to afford the home, or they were not credit worthy. This lead to loans being made with adjustable rates, or ballooning interest rates. All was well as long as the economy was stable for many of these people. The American dream of home ownership seemed to finally be coming true. However when the economy began to take a down turn there was concern this dream quickly began to turn into a nightmare. In 2007 over a million homes began to be foreclosed on as a result of the failing economy (Gilbert, 2011). Many of these foreclosures took place as a direct result of the subprime loans that were made in order to grow home ownership. Many argue that the it was unethical to make such loans to people, however it is my opinion that it was not necessarily the loans, but the amounts the loans were being written for. Many loan officers may have acted unethically in the amounts they were approving and the verification of the information given. These foreclosures also seemed to effect African Americans disproportionately because many of the loans written to African Americans allowed interest rates to grow beyond the risk being assed (Beeman, Glasberg, & Casey, 2011).  So the facts those loans were being made to people who could not normally afford a prime rate loan, or a loan with an average interest rate, and were often being over sold into a house they could not afford and charged more interest than they could afford made it a perfect unethical storm when the economy began to fall and homes began to be foreclosed on. This is why subprime loans were discussed as a viable factor of the failing economy.