Subprime mortgage exist to provide loan to those borrower who are not qualify for the conventional mortgage. It is a type of mortgage which is granted to the borrowers with poor or lower credit rating (Edoardo Turano, 2006).Generally, it offers interest-only loans because it is easier to afford. The loan does not require any principle to be paid in the few several years of the loan. Borrowers are always in the hope that they can make the payment before any principle is subjected. This will reduce their monthly payment. If they cannot fulfill the payment, they are usually defaulted since they cannot make the higher payment (Amadeo. K, n.d.).

Individual who have a financial problem before are classify in the group of higher risk and therefore they have a greater difficulties to obtaining credit, especially for large purchase such as house and car. These individual may had lost their job, medical issue, low income, large loans relative to the security property or any other unpredictable event which will cause a major setback in finance. As a result, late payment or foreclosures will happen. Lender with subprime mortgage bears the higher risk. In order to protect themselves from facing too many losses, subprime lender charge interest rates above the prime lending rates (Edoardo Turano, 2006).

1.2 Historical and background

Subprime mortgage industry has grown in the year 1990 (wikinvest, 2010). The credit market is evolved towards more efficiency. Subprime lending evolved with the realization of a demand in the market place for loans to higher-risk borrowers with imperfect credits history.