The banks gave out Subprime Variable Home Loans to borrowers that were very ques

Question

The banks gave out Subprime Variable Home Loans to borrowers that were very questionable at their ability to support the loans. The homeowners took loans that they were not able to afford as the variable rate loan increased, because they were told that houses always appreciated in value. Even if they couldn’t afford the mortgage after the “balloon payment” or the “teaser rate” expired, they would have built up equity in the house, and make a profit.

Unfortunately, this didn’t happen in 2008, and many homeowners who were “underwater” (their house was worth less than their mortgage), just left their properties. Discuss who you think was responsible for these loan defaults: the bank, the homeowner, or both?

Explanation / Answer

Both banks as well as homeowners are responsible for the lona defaults eventually leading to subprime crisis.

Banks, in an objective to increase the loan accounts and get increased interest income, have lent funds to the individuals without validating their credit history, ability to repay in future, any assets that can be liquidated etc.

Homeowners who were though, not able to afford the homes, have been given loans by the banks which they have accepted and bought houses under the assumption that house value appreciates in future. As many individuals have taken houses, it is all houses that were left and no liquid assets to purchase the houses from one another leading to leaving the properties to banks as mortgages.

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