Ignorance, writes:

Subprime lending has no official start date, but three events paved the way for the industry’s formation. First, the Depository Institutions Deregulation and Money Control Act (DIDMCA) of 1980 made the subprime business legal by allowing lenders to charge higher rates and fees to borrowers. Second, the Alternative Mortgage Transaction Parity Act (AMPTA) of 1982 allowed the use of variable interest rates (ARMs) and balloon payments. Finally, the Tax Reform Act (TRA) of 1986 prohibited the deduction of interest for consumer loans but allowed it for mortgages on a primary residence, increasing the demand for mortgage debt. When deductibility was factored in, even high-cost mortgage debt was a better option than consumer debt.

Beyond changes in the laws, however, Bitner points to a change in financial technology as allowing the subprime industry to grow. He says

Arguably, securitization could be the single greatest innovation to mortgage lending.

How did the securitization of subprime loans contribute to the financial crisis of 2007-2009? Make sure in your answer that you explain briefly what securitization is.

Answer rating: 100% (QA)

It is the process by which an issuer develops financial instruments by joining the financial assets ... View the full answer