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What Is A Forward Sale For Subprime Loans ?
Subprime loans are extended to the riskiest segment of customers. These customers would have either had a history of bankruptcy, defaulted on their loan repayments or in general, have low incomes. |
This customer segment is not preferred segment of borrowers as far as the traditional loan lenders are concerned. The subprime lenders, however, see them as potentially eligible borrowers and lend them loans with higher interest rates.So, it is but natural that the lenders will look for forward sale options to reduce their risk. A forward sale is an agreement between the lender and the investor. The agreement is basically a strategy to reduce the risk by selling specific category of loans at a particular price and suitable time. This strategy is adopted in order to safeguard the investor money or investment as it is being given as loan to a riskier segment of customers. According to the agreement, the subprime lender assures an investor or investors of a specific amount of payment over a particular period of time at a given interest rate. The investors can be fund managers, insurers, investment banks, hedge funds etc.
Most subprime lenders have enhanced the lending capacity by marketing the loans in asset-based securities trading market. The subprime lenders have got the impetus from a favorable demand from the investors and equally favorable accounting policies. Nevertheless, investing in asset based securities market is risky like most other investment options. These risks can vary from credit risk to liquidity risk and these risks may outweigh the potential benefits that loan securitization may provide.
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