Question

Recall that​ "securitization" is the process of turning a​ loan, such as a​ mortgage, into a bond that can be bought and sold in secondary markets. An article in the Economist ​notes: That securitization caused more subprime mortgages to be written is not in doubt. By offering access to a much deeper pool of​ capital, securitization helped to bring down the cost of mortgages and made​ home-ownership more affordable for borrowers with poor credit histories. ​Source: "Ruptured​ Credit," Economist​, May​ 15, 2008. What is a​ "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit​ history?

Answer 1

Answer:

1. Lending to people of poor credit history

2. Yes

Explanation:

1. What is a​ "subprime mortgage,"

Subprime mortgages by definition is the act of lending money to people of poor credit history or bad credit rating.

2. Would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit​ history?

Just like the name suggests, subprime will mean lending at a rate higher than the prime rate which means they pay higher interest rates because the fact that they have poor credit ratings or history means that they are more likely to default,

It is hence logical that since the risk of lending to them is higher, they need to compensate for that  by paying a higher interest rate.