Question

Explain how subprime and, sometimes, “zero doc,” loans, contributed to the Great Recession of 2008-11.

Answer 1

Great recession has turned even more worse due to subprime and zero doc loans.Usually loans are given to people by considering their financial and earning capacity.If a person's earning and savings capacity is low,then less amount or no loan is granted to that person.But in subprime loans provide a facility were people can take loans beyond their financial capacity.Subprime loans are granted even if a person's financial status is not that good and is not in a repayable state.The same happened and it contributed to great recession.Subprime loans were given by financial institutions and banks to the people.Generally borrowing rate or interest rates on subprime loans are maximum and people who are granted with such loans were not able to pay back the amount.As financial capacity of a person is not considered while providing subprime loan and as high amount is sanctioned,low income people were not in a position to repay loan.This made banks and financial institutions go cashless and huge loss occured. Since loans aren't repayed,banks faced severe losses.This caused disturbance in financial and monetary system and economy got destroyed.From then unemployment,low budget of economy persisted.Funds and budget of the government turned nil due to destruction of monetary and financial system of economy.Even zero doc loans contributed to great recession.Unlike other loans,zero document loans has less documentation and low paper work.People who are applying for zero doc loans,there is no need to submit the documents,security,etc.They are easily granted with loan in a easy procedure.Banks and lending institutions started providing zero doc loans during great recession.People whoever took zero doc loans went missing since their details were not taken completely. People failed to repay loans and banks again witnessed losses.This worsened the situation during great recession and countries faced bad economic conditions.Hence, in this way subprime and zero document loans contributed towards great recession.Economy completely fell and got worse since financial status was disturbed and employment level was low.