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Dow Jones. So far, only about 20 subprime lenders have failed. And because subprime loans are packed into mortgaged-backed securities and traded on the secondary market, losses will be diluted among investors worldwide rather than concentrated in the institutions that originated the loans. Compared to past difficult periods, we have not had a serious bank failure since June Most subprime borrowers are not in trouble, and many have been able to buy homes only because subprime loans were available.
Over the past two decades, the government has tended to take a less direct role in managing the economy and to instead encourage efficient markets through better disclosure of information, points out Anita Summers, emeritus professor of real estate at Wharton. This means, for example, that there are fewer trade tariffs, but also that consumers can get a lot more information about financial products, foods and drugs.
The main lesson to be learned from the subprime crisis may be that borrowers need to know more about the risky products they are offered. Subprime lenders knew they faced risks with products such as interest-only mortgages, Sinai says. With a standard mortgage, part of every monthly payment reduces principal. As the loan balance shrinks and housing prices rise, the lender has a growing assurance the property can be sold in foreclosure for enough to cover the debt.
But that is not the case when the borrower pays only interest. Subprime lenders knew the risks they were taking, as did investors, such as hedge funds, that bought securities based on subprime loans, according to Sinai. Most proposals for remedies have focused on borrowers. Dodd and some consumer groups believe many borrowers were lured into subprime mortgages by predatory lenders who concealed the risks, and experts say subprime lenders often paid mortgage brokers commissions two or three times those on prime loans.
Consequently, Dodd says he will introduce measures to curb predatory lending. He has yet to offer details. And so far it is not clear how many subprime borrowers can truly be described as victims.
If they lose their homes, they will simply return to the ranks of renters. Other borrowers undoubtedly are speculators who were so overextended they could not get prime loans. Are people who chose to take huge, unnecessary risks, worthy of public sympathy and help? Some consumer groups are pushing for new rules requiring that lenders match borrowers only to those products that are suitable for them. View full article. Sign in Don't already have an account?
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