Sub-prime mortgages are sold to people of lower credit standing, or offer additional financing beyond the prudent limit.
Many borrowers are not able to pay the interest on these loans or the principal installments. There is a high default rate.
Many borrowers were not given proper advice on the financial impact of the loans. They were not told about the actual payments that have to be made, and their ability to afford these payments.
The Federal Reserve Board has acknowledged that this problem is within their responsibility. They are taking the following steps:
* set standards for the lenders
* require proper disclose of the terms to the borrowers
* make sure that the terms are in language that the layman can understand.
Lesson: We need a similar approach for the financial service sector in Singapore.
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