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| English: Mortgage Loan Fraud Assessment based upon Suspicious Activity Report Analysis (Photo credit: Wikipedia) |
Understanding Sub Prime
Origin of sub-prime
Prime loan also means A-paper loan it is a term used to describe a mortgage laon where the asset and borrower meet the following criteria:
- In the United States, the borrower has a credit score of 680 or higher
- The borrower fully documents their income and assets
- The borrower’s debt to income ratio does not exceed 35%
- The borrower retains 2months of mortgage payments in reserves after closing.
- The borrower injects at least 20% equity
In short, prime loan means a loan given to a borrower having good credit history and good earnings potential clubbed with strong security in terms of cash or assets.
Sub prime loans means B-paper loan where the asset and the borrower does not fulfill the mandatory criteria for borrowing a loan.
- It is exactly antonym of prime loans these loans are disbursed to borrows having poor credit history low income and earnings potential having less or no collateral.
- As the borrower and the asset does not meet the mandatory criteria for loan, he has to shell out more money for the loan in short the interest charged to him is more then charged in the prime loan. The extra interest he needs to pay to make-up for low credit score.
- Sub prime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. Sub prime borrowers are generally defined as individuals with limited income or having FICO credit scores below 620 on a scale that ranges from 300 to 850. Sub prime mortgage loans have a much higher rate of default than prime mortgage loans and are price based on the risk assumed by the lender.
- If the sub prime borrower defaults which is very likely to happen, then the asset for which loan is taken is foreclosed.
In the US housing boom which started in the 1990’s every thing seemed hunkey-dory then. In this boom the brokers of housing loan had a time of there life as they pushed in for loans to the borrowers who cannot afford it and made good fees out of it. This pile of junk loans quintupled over the years and found its way into various debt papers, bonds and CDO’s. Not only did it find its way in to Wall Street but also plagued various geographies globally.
As you check the flow2 sheet of how the sub prime money trail you will find that the mess is a cumulative efforts of the greed at all levels. Starting from prospective home owners who bought something which they didn’t deserve or afford, to the home loan brokers and then from banks & financial institutions who bought this loan and bundled them in to CDO’s, to ultimately the credit rating agency who rated them a investible assets, before the CDO producers floated them in the secondary markets for trading.
Prime loan also means A-paper loan it is a term used to describe a mortgage laon where the asset and borrower meet the following criteria:
- In the United States, the borrower has a credit score of 680 or higher
- The borrower fully documents their income and assets
- The borrower’s debt to income ratio does not exceed 35%
- The borrower retains 2months of mortgage payments in reserves after closing.
- The borrower injects at least 20% equity
In short, prime loan means a loan given to a borrower having good credit history and good earnings potential clubbed with strong security in terms of cash or assets.
Sub prime loans means B-paper loan where the asset and the borrower does not fulfill the mandatory criteria for borrowing a loan.
- It is exactly antonym of prime loans these loans are disbursed to borrows having poor credit history low income and earnings potential having less or no collateral.
- As the borrower and the asset does not meet the mandatory criteria for loan, he has to shell out more money for the loan in short the interest charged to him is more then charged in the prime loan. The extra interest he needs to pay to make-up for low credit score.
- Sub prime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. Sub prime borrowers are generally defined as individuals with limited income or having FICO credit scores below 620 on a scale that ranges from 300 to 850. Sub prime mortgage loans have a much higher rate of default than prime mortgage loans and are price based on the risk assumed by the lender.
- If the sub prime borrower defaults which is very likely to happen, then the asset for which loan is taken is foreclosed.
In the US housing boom which started in the 1990’s every thing seemed hunkey-dory then. In this boom the brokers of housing loan had a time of there life as they pushed in for loans to the borrowers who cannot afford it and made good fees out of it. This pile of junk loans quintupled over the years and found its way into various debt papers, bonds and CDO’s. Not only did it find its way in to Wall Street but also plagued various geographies globally.
As you check the flow2 sheet of how the sub prime money trail you will find that the mess is a cumulative efforts of the greed at all levels. Starting from prospective home owners who bought something which they didn’t deserve or afford, to the home loan brokers and then from banks & financial institutions who bought this loan and bundled them in to CDO’s, to ultimately the credit rating agency who rated them a investible assets, before the CDO producers floated them in the secondary markets for trading.
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