The term subprime mortgage, refers to the credit quality of certain borrowers, who have weak credit histories and a greater risk of default on loans than primary borrowers.
A term used in the practice of extending credit to borrowers (debtors) who do not meet the credit requirements to be granted loans at market interest rates because the debtor has an unfavorable “credit record”.
This sub-primary credit is very risky for both the lender (creditor) and for the borrower (debtor) due to the combination of high interest rates charged, poor credit record, and often the debtor’s unfavorable financial situation is also encountered in credit applications.
This so-called credit rating, although covered by privacy laws, the information is available to people with a need to know (in some countries, loan applications specifically allow lenders to access the records).
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ubprime borrowers have credit ratings that may include:
Limited debt experience (so the lender’s appraiser has absolutely no clue, and assumes the worst), or
Do not have ownership of property assets that can be used as collateral (for the lender to sell in the event of default)
Excessive debt (individual or family income that is known to be insufficient to pay living expenses, interest, repayments),
History of late or sometimes missed payments so that the loan period must be extended,
Failure to pay the debt in full (bad debt), and
Any legal rulings such as “order to pay” or bankruptcy.
The lender’s standard for determining the risk category can also take into account the size of the proposed loan, and also consider the way the loan and repayment plan are structured, if it is a conventional repayment loan, mortgage loan, endowment mortgage, and interest only loans, standard repayment loans, amortized loans, credit card limit or other settings. Triggers are also considered.
It is therefore possible that loans to borrowers with “prime” characteristics (eg high credit score, low debt) can be classified as subprime.
One of the effects of the crisis that has occurred,
Around 2008 there was a crisis in America which was a serious financial problem in Uncle Sam’s country.
The crisis that occurred in America that year was the start of the collapse of the oldest and largest investment bank in America, namely Lehman Brothers Bank. At that time, Richard Severein Fuld was the oldest CEO of the Bank.
At that time Lehman Brothers decided to borrow money from the Federal Reserve (hereinafter Bank Indonesia) with a very large amount.
A larger loan amount than investment banks in general.
Because the chronological sequence of events is a series of wrong investment activities in determining the steps. As is known, America is the center of the world’s largest stock circulation based on Wall Street. This is where the investment turnover of investors plays a role in multiplying their money. The dark history of the American economy teaches us the importance of careful calculation in every decision.
Prime mortgage is a classification of credit loans given to people with high credit scores. So in the United States banking world there is such a thing as a “credit score” which assesses a person’s eligibility to get a credit loan, this value is obtained by calculating a person’s income to past credit history. If someone calls him Nunung, he has a high income and a past credit history that is always paid off, then Nunung gets a credit score above 600. On the other hand, Azis has a mediocre income and there is a history of credit arrears in the past, this makes Azis have credit score below 600.
For the banking world in the United States, people who have a credit score of 600 and intend to apply for a credit loan to the bank will get a loan product with standard interest according to the interest rate at that time. This loan product is called the Prime mortgage, which is a loan product that can only be obtained by those who have a credit score above 600. However, if on the other hand there are people who have a credit score below 600 and intend to apply for a credit loan to the bank, he also still has it. opportunity but unfortunately will get a higher interest because the bank sees a big risk of default in the future. This loan product for the public with a credit score below 600 is called a subprime mortgage.
How is the prime mortgage related to the crisis?
When it comes to prime mortgages, this has nothing to do with the global crisis that hit most of the world. The cause of the global crisis in 2008 was that many unscrupulous banks were too easy to provide subprime mortgages to people who wanted to apply for mortgages, even though most of them were not proven to have enough income to pay the predetermined installments. So that when one day The FED raised interest rates and the value of loan interest also increased, most of the people who were in the Subprime Mortgage program were unable to pay the installments whose value increased from before. The impact was that many banks eventually went out of business because they had already given Subprime mortgages to many people, resulting in a global crisis because there were many investors who also bought some of the Subprime Mortgage contracts.
When a bank provides a Subprime Mortgage type loan to a customer, the loan is made into a contract which can be sold to investors. The investors pay a sum of money to the bank that sells the subprime mortgage contract so that when the customer pays the installments, the money will be distributed to investors. Investors are interested in buying subprime mortgage contracts because of the higher interest rates, people are usually attracted by the luring of bigger profits. Until finally, many customers were unable to pay the installments so that many investors suffered losses as well as some banks that had been aggressive in distributing this subprime mortgage.
Ownership of Subprime Mortgage debt securities is always present in the central banks of all countries in the event of a crisis. Banking stock prices will automatically decline, this is what makes market participants very worried and will have an impact on the weakening of a country’s economic activity, if this happens, the central bank must be responsible responsibility in order to be able to maintain long-term economic performance.
In order to be able to overcome this problem, the solution is that the central bank pours funds into the money market by entering a repurchase agreement so that they are able to maintain exchange rate stability so that they can foster positive sentiment towards all aspects of the economy, which is better than before.
