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Typically, those who qualify for the most ideal mortgages with the best interest rates are those with good credit scores and minimal debt. A subprime mortgage is a type of loan granted to individuals with poor credit histories, who would not be able to qualify for conventional mortgages. Subprime mortgages charge interest rates that are above the typical interest rate because of the risk that is involved on the part of the lender.
The crisis began with the bursting of the housing bubble in the US & high default rates on subprime & adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income or lesser credit history than prime.
LIQUIDITY OVER
The chart above brings out the irony and shows that underlying sub prime houses are only a small percentage of the total housing market and it was the bubble formed due to financial instruments viz. MBS, CDO and CDS, that caused the real problem
The problem with investment bank balance sheets is that on the left side nothing is right and on the right side nothing is left
What's the difference between a bond and a bond trader? A bond matures
Sequence of events
Poland: Part of Eurozone,but has a stable banking sector Ireland: First Eurozone country to slide into recession France: Sluggish economy heading for recession Hungary: -ve credit raing, heavy debts, huge current account deficit
Russia: Fast growing economy with large foreign reserves China: ??? Strained with economic surplus and counterfeit goods Singapore: Prosperous, government guarantee for deposits till 2010
As a result, credit is tightened for borrowers across the board, affecting commercial real estate, leveraged buyouts, venture capital lending, mergers and acquisitions, etc.
Ongoing Effects:
Subprime mortgage industry collapses, thousands of jobs are lost Surge of foreclosure activity Housing prices and sales are both down Interest rates rise across the board as the effects of the collapse of the subprime mortgage industry seep into the near-prime and prime mortgage markets Investors lost billions of dollars in securities tied to the subprime mortgage industry, resulting in upheavals throughout the global financial market
Government Action:
To avoid complete market failure and to allow banks to borrow money cheaply, the Federal Reserve, European Central Bank, and their counterparts flood the market with billions of dollars, Euros, and yen in August 2007. The injected government funds are designed to encourage banks to continue making loans rather than conserving cash and making the credit crunch worse. Analysts are concerned that rather than calming the markets and biding time for the crisis to pass, government action will lead to inflation and an international credit crunch that would slow economic growth worldwide.
Who is to Blame?
Lenders: for their predatory lending practices focused on subprime mortgage candidates Mortgage brokers: for steering borrowers to unaffordable loans Appraisers: for inflating housing values Wall Street investors: for backing subprime mortgage loans without first verifying the security of the portfolio Borrowers: for overstating income levels on loan applications and entering into loan agreements they could not afford Government: for lack of oversight
Congratulations if you answered "Yes" to most or all of those questions! You're an ideal target for a subprime mortgage lender.
Thank You