Mike DeLucchi's Blog

A subprime mortgage is a particular type of loan granted to individuals with poor credit ratings, whom would not be able to receive a conventional mortgage due to these low credit scores. They work in the sense that borrowers initially pay a lowered interest rate, which is what attracts them, until an eventual reset to a higher, variable rate resulting in significant payment increases. This often led to many subprime foreclosures due to their misleading nature in confusing borrowers. The act of subprime mortgaging is markedly unethical as lenders look to attract and take advantage of those with a lack of or very low credit, and those faced with lower incomes. However, the extreme unethical aspects of this agreement are the predatory techniques banks, like the Lehman Brothers use. For instance, they seek naïve borrowers, and pressure future home owners to re-finance, frequently charging high closing fees and rolling closing cost into mortgage. In addition, they deter clients from shopping for alternate mortgage lenders; convincing them it will hurt their credit score. There is also no disclosure that the broker is being paid by both the lender and borrower.

Link: http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp