Question

Subprime mortgage loans:

A. are made to borrowers with low credit scores.
B. have lower interest rates than those in the general market.
C. are made to borrowers with higher-than-average credit scores.
D. have interest rates that are lower than the prime rate.

Answer 1

Subprime mortgage loans are for borrowers with lower credit scores (option A) and come with higher, often adjustable interest rates. The increase in such high-risk lending, including NINJA loans, played a role in the Great Recession.

Step-by-step explanation:

Subprime mortgage loans are typically offered to borrowers with lower credit scores. These loans come with interest rates that are higher than those of conventional mortgages. The higher rates compensate for the increased risk of default that lenders face when dealing with borrowers who have poor credit histories or other financial issues. Subprime loans can have adjustable rates, meaning the interest rate might be initially low, but can increase significantly over time, leading to much higher payments for the borrower.

During the 1990s and early 2000s, changes in finance and banking laws led to an increase in the securitization of mortgage loans, encouraging banks to issue more subprime loans. These included NINJA loans, which were given to borrowers with No Income, No Job, or Assets. The offering of these riskier loans, later sold as bonds, was a contributing factor to the economic downturn known as the "Great Recession."