1. Subprime Mortgages
Subprime mortgages are mortgages taken out by the least credit-worthy customers, meaning they have very low credit scores. Statistically speaking, borrowers with lower credit scores are more likely to default on their loans. These mortgages do pay higher interest rates to investors, but they involve significant additional risk.
Why Subprime Mortgages Are Toxic
Subprime mortgages are the poster child for toxic investments. In the 2008 financial crisis, these were the investments — many of which ended up worthless — that dragged down some of the biggest names in the stock market, including Lehman Brothers. Although lending regulations have tightened since 2008, subprime mortgages are still literally “subprime,” meaning they are low-rated investments with a higher potential for default. With so many other investment options available, the checkered history and low standing of subprime loans make them toxic investments.
