What is Subprime Crisis? How to solve the subprime crisis?
November 27, 2007 at 9:55 am 100 comments
The current Subprime crisis is not really a crisis due to over lending of banks, but situation created due to sub prime lending. Banks don’t have enough money to lend money. We will start with subprime lending.
What is sub prime lending?
The term “subprime” refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself. “sub prime” is any loan that does not meet “prime” guidelines. If your mid fico score is below 620 and you have any mortgage rates within 12 months or recent BK/foreclosure, you are considered “sub prime”.
Subprime lending, also called B-paper, near-prime, or second chance lending, is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. The phrase also refers to paper taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and certain types of self-employed individuals. Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. (wikipedia ).
What about lending rates?
To avoid the initial hit of higher mortgage payments, most subprime borrowers take out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up charging much more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,470. A 6-percentage-point increase in the rate caused slightly more than an 85% increase in the payment.
The 2/28 ARM
A very common mortgage in the subprime market, which we have never seen outside of that market, is the 2/28 ARM. This is an adjustable rate mortgage on which the rate is fixed for 2 years, and then reset to equal the value of a rate index at that time, plus a margin. Because the margins are high, the rate on most 2/28s will often rise sharply at the 2-year mark, even if market rates do not change during the period.
For example, the rate is 8% for 2 years but the index is currently 4% and the margin is 6%. If the index remains at 4% after 2 years, the loan rate will jump to 10%.
Some borrowers with poor credit scores take a 2/28 at a high rate and plan to rebuild their credit during the 2-year period. Their plan is to refinance at a better rate at that time. The major threat to such a plan is a prepayment penalty that runs past two years, which some do; and a lender who fails to report their payment history to the credit reporting agencies. Borrowers should be on their guard against both.
Who opt subprime lending?
Individuals who have experienced severe financial problems are usually labeled as higher risk and therefore have greater difficulty obtaining credit, especially for large purchases such as automobiles or real estate. These individuals may have had job loss, previous debt or marital problems, or unexpected medical issues, usually these events were unforeseen and cause a major setback in finances. As a result, late payments, charge-offs, repossessions and even foreclosures may result.
Due to these previous credit problems, these individuals may also be precluded from obtaining any type of loan for an automobile. To meet this demand, lenders have seen that a tiered pricing arrangement, one which allows these individuals to pay a higher interest rate, may allow loans which otherwise may not occur.
From a servicing standpoint, these loans have higher collection defaults and experience higher repossessions and charge offs. Lenders use the higher interest rate to offset these anticipated higher costs.
Provided a consumer will enter into this arrangement with the understanding that they are higher risk, and must make diligent efforts to pay, these loans do indeed serve those who would otherwise be undeserved. The consumer must purchase an automobile which is well within their means, and carries a payment well within their budget.
How the subprime crisis started?
The subprime lending is 9% in 1996 but in 2004 it is 21%. Due to securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others. In addition to considering higher-risk borrowers, lenders have offered increasingly high risk loan options and incentives to them.
Homeowners had been using the increased property value experienced in the housing bubble to refinance their homes with lower interest rates and take out second mortgages against the added value to use the funds for consumer spending. Between 1997 and 2006, American home prices increased by 124%.Easy credit combined with the assumption that housing prices would continue to appreciate also encouraged many subprime borrowers to obtain ARM they could not afford after the initial incentive period. With housing prices now depreciating moderately in many parts of the U.S., refinancing has become difficult, leaving homeowners with higher payments than anticipated.
Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the USA’s second biggest subprime lender.The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole.
However, the crisis has had far-reaching consequences across the world. Sub-prime debts were repackaged by banks and trading houses into attractive-looking investment vehicles and securities that were snapped up by banks, traders and hedge funds on the US, European and Asian markets. Thus when the crisis hit the subprime mortgage industry, those who bought into the market suddenly found their investments near-valueless. With market paranoia setting in, banks reined in their lending to each other and to business, leading to rising interest rates and difficulty in maintaining credit lines. As a result, ordinary, run-of-the-mill and healthy businesses across the world with no direct connection whatsoever to US sub-prime suddenly started facing difficulties or even folding due to the banks’ unwillingness to budge on credit lines.
As a result
Right now there is “liquidity crisis” on wall street. Basically, because so many sub prime loans are in default, Wall Street investors are no longer supplying money to market which lenders use to lend out over and over again. They make money by originating a loan and selling it to someone else who pays the lender a premium based on future revenue. If lenders cannot “sell” these loans they cannot generate new business. Since guidelines are now so tight, many of these “subprime” borrowers will not be able to refinance their loan. They took short term adjustable loans (2-3yr fixed) which are now adjusting to much higher rates. They can’t afford the new payment and they can’t refi either due to no equity or poor credit.
In the UK, some commentators have predicted that the UK housing market will in fact be largely unaffected by the US subprime crisis, and have classed it as a localized phenomenon.However, in September 2007 Northern Rock, the UK’s fifth largest mortgage provider, had to seek emergency funding from the Bank of England, the UK’s central bank as a result of problems in international credit markets attributed to the sub-prime lending crisis.
What about solution?
Loan modification, pumping money into market may slow down the crisis.
- Establish rescue funds for borrowers facing short-term problems caused by illness, layoffs or other one-time events.
- Establish a bond fund to pay for switching borrowers out of unaffordable ARMs.
- Refinance loans for victims of predatory lending. This would involve working with Fannie Mae, the quasi-governmental corporation.
Changing loan terms is a mess, borrowerand lender must accept to the terms, lenders may be unwilling to change terms but Fed interference will work out. But lender will accept to change in terms to avoid foreclosures.
Pumping money into markets, reducing bank reserves may temporarily weaken the crisis, but these this is two fold operation, pumping money will increase inflation which will results in increase in subprime lending, and reducing bank reserves to small extent is better but as whole destabilize the whole financial system.
Here are some guidelines to prevent that from happening to you:
* Never respond favorably to a solicitation without first checking other options. If you deal with only one loan provider, your prospects are better if you make your selection by throwing a dart at the yellow pages than by accepting a solicitation.
* Check your eligibility for mainstream financing with mainstream lenders. The easiest way to do that is on-line. Some sites that I like for this purpose are Eloan.com, Amerisave.com, and NationalMortgageAlliance.com. These are all Upfront Mortgage Lenders.
* If you can’t qualify with any of them, your best bet is an Upfront Mortgage Broker. They may charge sub-prime applicants a little more because they require more time. You will know what they charge, however, and you will know that you are getting the wholesale price posted by the lender, which means you won’t be exploited.
Entry filed under: Macroeconomics.
100 Comments Add your own
Leave a comment
Trackback this post | Subscribe to the comments via RSS Feed
సామాన్యుడి అస్త్రం Common Man's Missile 
1.
Caveman | March 27, 2008 at 12:02 am
This is well written, I have enjoyed reading your posts. Keep up the good work.
2.
Anees | April 17, 2008 at 1:55 pm
Great article.. straight forward..
3.
akshay | April 25, 2008 at 3:09 pm
excellent article! very helpful in understanding subprime crisis.
4.
Tej | July 2, 2008 at 6:16 am
Very good article ……. informative..
Thanks
Tej
5.
Aishvarya.R | July 31, 2008 at 9:37 pm
Thank you. Very informative. Great going.
6.
Anil | February 23, 2012 at 12:26 pm
yes gud articke
7.
Dhyan | August 6, 2008 at 4:09 pm
Very nice and informative article…
8.
mukut boruah | August 7, 2008 at 10:09 am
…. its a nice article…. it helps me a lot to understand what exactly a sub-prime crisis.!!!!!!!
9.
prem kumar erddy | August 23, 2008 at 7:41 pm
very good article……………………….thanks.
10.
Md.Nadeem Raza | September 4, 2008 at 8:01 pm
this is a nice article which enhance my knowledge about subprime cricis.thanks
11.
vidya | September 14, 2008 at 9:19 pm
very informative, ty
12.
AMRENDRA JHA | September 15, 2008 at 6:42 pm
thanks for vgood article
13.
Saurabh | September 16, 2008 at 4:45 pm
Very simple & effective article .
14.
ron | September 17, 2008 at 7:30 am
gud job keep it up
15.
Rohan Bhavsar | September 17, 2008 at 10:39 am
Very good article. Thanks.
16.
jyot chhaya | September 17, 2008 at 10:47 pm
really good
17.
harry | September 18, 2008 at 12:10 pm
This is really good.I understood clearly.good job , keep it up.
18.
Jigar.p | September 18, 2008 at 2:28 pm
information is very crucial for student
19.
hiten advani | September 18, 2008 at 2:51 pm
m very impressed by this site juss requstin u to mail me all this kind of stuff.
thankin u
20.
shrikant | September 18, 2008 at 3:02 pm
easy to understand and really common man can understand good work….
21.
Anonymous | September 18, 2008 at 6:16 pm
great…. simple and crisp!!!
22.
Victor de Kent | September 18, 2008 at 7:26 pm
Thanks, it’s a clear explanation.
23.
kalsi | September 18, 2008 at 9:20 pm
now i know what is sub prime. Thanks…Good Work !!!!
24.
Srikanth | September 18, 2008 at 10:46 pm
Good article dude.. Keep it up
25.
Rohit Battan | September 19, 2008 at 1:00 am
its really good. the language is very easy to understand.its good for students
thanks keep it up
26.
Nitesh Sharma | September 19, 2008 at 2:20 am
This is really a nice article which is having a depth for whom who are get affected from this crisis.
I would like to see this article in any of the leading News Paper in India in their Hindi version so that the Layman also get information about this Global problem.
Regards
Nitesh Sharma
http://www.smatrtnitesh.blogspot.com
M: 9414528291/9829813181
27.
srileka | September 20, 2008 at 3:55 pm
good article .. after gone through this article i got clear idea..
thank u
28.
supriyai | September 20, 2008 at 9:48 pm
Linear and neatly explained. Thanks
29.
bindhu reddy | September 21, 2008 at 10:58 am
suprb article……………..
30.
harshal panot | September 21, 2008 at 11:06 pm
well done… i too enjoyed reading the article….
31.
Vipin P Varghese | September 22, 2008 at 12:54 am
This Is really an all in all article about the Subprime crisis which would enable even ordinary poeple to understand the issue….thanks for sucha nive article…..
32.
gautam bhati | September 22, 2008 at 10:22 pm
this type of articles are very information giving and are beneficial for students, employees , investors etc. keep it up . good job
33.
parikshit | September 23, 2008 at 11:08 am
it is very good
34.
srinivas | September 24, 2008 at 4:07 pm
Really good article.
35.
ally | September 24, 2008 at 5:56 pm
well written article,defined well and easy to understand! thanks!
36.
Mathan Kumar | September 24, 2008 at 11:15 pm
Thank You !
Powerful meanings / facts with simple language. Appreciate it!!!
37.
varsha | September 25, 2008 at 2:12 pm
Extremely good article,easy language .
Cause and advisory solution both covered effectively.
38.
Jatinder singh Sandhu | September 26, 2008 at 2:12 am
very helpful to understand sub-prime crisis……. keep it up
39.
rajnish sharma | September 27, 2008 at 1:01 pm
A very good article indeed, keep up your hard work.
40.
sanjeev dwivedi | September 28, 2008 at 1:31 am
nice, thanx google
41.
janpriys | September 28, 2008 at 12:44 pm
I would like to appreciate the language and insights given in the article……Thanks
42.
Anonymous | October 3, 2008 at 8:23 pm
you should quote wikipedia~~~!!!
43.
Nithyanandam | October 6, 2008 at 7:35 pm
Thanks for very good article.
44.
manisha | October 6, 2008 at 11:07 pm
send the crisis
45.
Anonymous | October 12, 2008 at 11:37 am
Sub – Prime bared. Thanks.
46.
Jyoti gawri | October 16, 2008 at 3:16 pm
Thanks for very good article its really good
47.
kris | October 16, 2008 at 11:03 pm
Good One .
Thanx for really good article
48.
Taher | October 18, 2008 at 3:17 pm
Great article!
So much information and wisdom in one nut shell.
Great work, keep it up!!!
49.
Anonymous | October 20, 2008 at 2:31 pm
Very well written and informative.
50.
mohit | November 1, 2008 at 10:06 am
Excellent work,it will enhance my knowledge about the Global crisis
51.
mohit | November 1, 2008 at 11:23 am
Excellent work,it will enhance our knowledge about the Global crisis
52.
sharad | November 3, 2008 at 8:16 pm
very good article and the best way to define difficult term, very helpful to enhance knw and know about globle financial crisis , well done…..
53.
anshul agrawal | November 7, 2008 at 10:43 am
it is informative and very easy to understant
54.
anshul agrawal | November 7, 2008 at 10:44 am
its informative and straight forward
55.
farzin | November 9, 2008 at 12:33 pm
it was an great article very crisp and clear which helped me understand subprime crisis very well
56.
Nab | November 10, 2008 at 2:57 pm
habadari article
57.
moo | November 21, 2008 at 7:50 am
Very helpful for my school assignment. Thanks
58.
kishor | November 23, 2008 at 11:27 pm
really gud artical,keepit up
59.
ankitgoel | December 1, 2008 at 10:29 pm
good article with better understanding
60.
prads | December 12, 2008 at 7:47 pm
very good
61.
PRIYA | December 22, 2008 at 8:03 pm
very good article…very informative.it will help me to understand that what is subprime crisis, in a easiest way.thanx
62.
ANIL KUMAR BHASKER | January 1, 2009 at 8:42 pm
WHAT IS SUBPRIME CRISIS AND MEASURES TO CONTROL IT.
63.
karan | January 28, 2009 at 3:31 pm
its very enlightening
64.
Prabhash | February 2, 2009 at 12:46 pm
Thanks for the information
65.
PRAVEEN | February 22, 2009 at 6:35 pm
this article made me clear abot subprime crisis.thanks
66.
gour gopal goswami | February 23, 2009 at 1:24 pm
very goog article
67.
shakil khan | March 26, 2009 at 6:32 pm
It is realy very good artice focousing in all aspects n language n way of presenting is realy very affecting keepit up
68.
Sunil | April 17, 2009 at 4:16 pm
Its a damn good artcle… hats off for u…
69.
mussa cohen | April 30, 2009 at 2:37 pm
REINVENTING VALUATIONS & DECISION MAKING PROCESS
12.8 TRILLIONS COMMITTED, so far, are NECESSARY to DEFER the problem but INSUFFICIENT & INCOMPLETE to permanently FIX this messy situation which requires overhauling the present prehistoric totally FLAWED disfunctional management information system and installing a new INFRASTRUCTURE with STRATEGIC & LOGISTIC modern multiplatform and multidimensional TOOLS to handle complex instruments, as complementary optimization for an adequate DECISION MAKING PROCESS in : MONITORING, PRICING, VALUATION, MANAGEMENT , AUDITING , RATING, REGULATING, and RESCUEING to restore CLARITY + CREDIBILITY + CONFIDENCE, as KEY ingredients to put an end and properly SOLVE this wild , deadly and unmanageable CRISIS.
FOR YOUR FREE SYNTHESIZED COPY OF MY PROJECT: CLICK HERE
lastmo@live.fr
for an open live multidimensional framework system
Mussa COHEN
Systems & Financial Analyst
Business Administration – Majoring EDP – PACE University – N.Y / U.S.A.
Call me at: 00 972 88.642.609 or e-mail me at: lastmo@live.fr
70.
dare devil | August 1, 2009 at 3:31 pm
fuking piece of shit
71.
Azher | September 26, 2009 at 1:56 pm
this is al lie
72.
Amit | November 26, 2009 at 5:52 pm
Like your article.
Used simple language.
Thnks for the information
73.
vidyotma mishra | December 5, 2009 at 12:55 am
very good article
74.
Gyana Ranjan Mishra | December 18, 2009 at 9:18 pm
Thanks 4 such great deed which helps a many….
75.
nikhil | March 27, 2010 at 3:41 pm
good for layman like me(except d arms)
76.
Angel Uk | May 15, 2010 at 9:57 pm
It is a work well done. Infact, u are my model in finance. More strength to ur elbows!
77.
mahesh.n | September 29, 2010 at 4:00 pm
…. its a nice article…. it helps me a lot to understand what exactly a sub-prime crisis.!!!!!!!
78. subprime crisis « sonusimla | January 24, 2011 at 10:56 pm
[…] What is Subprime Crisis? How to solve the subprime crisis? […]
79.
DanPakDan | March 31, 2011 at 3:36 pm
With The Name Of God, Most Beneficence, Most Merciful.
Thank for the knowledge you just gave it to me. Ur writing about this sub-prime really nice to read.Keep it rose, sharing is caring.:)
80.
Rajneesh kumar | April 7, 2011 at 12:55 pm
Its appriciable, it give the detail illustration
81.
varunhegde | June 23, 2011 at 6:10 pm
nice simple easy to understand..thnx!
82.
Mofate | November 12, 2011 at 8:28 pm
Thanx 4 great info. I like i like.. ..
Continue da good work
83.
Anonymous | November 20, 2011 at 7:53 pm
you report is just good for me ,thanks!
84.
Anonymous | December 26, 2011 at 12:07 am
nice article ,contain all relevant information regarding sub prime crisis
85.
Anonymous | February 18, 2012 at 3:10 am
reallly good article to understand sub prime crisis.. thanks alot.
86.
Kanchan | May 16, 2012 at 4:57 pm
excellent article on sub-prime crisis……..
87.
Anonymous | May 28, 2012 at 8:55 am
Gud One…
88.
Anonymous | June 27, 2012 at 10:16 pm
mindbloing dude……
89.
Anonymous | July 19, 2012 at 8:20 am
finally a good understanding of subprime crisis…
90.
Niwadchad.Tumblr.Com | November 6, 2012 at 6:18 am
Your style is downright sweet. Like William Shakespeare.
91.
unfreeze ipod classic | January 3, 2013 at 9:33 am
I know this web site provides quality based content and additional data, is there any other web page which offers these stuff in quality?
92.
keepwebsimple.de | May 8, 2013 at 11:07 pm
You could certainly see your enthusiasm in the article you write.
The world hopes for even more passionate writers like
you who aren’t afraid to say how they believe. At all times follow your heart.
93.
Elton | May 10, 2013 at 2:16 pm
If you would like to grow your know-how just keep visiting this web site and be updated with
the hottest news update posted here.
94.
Zu Swk-kredit.info | May 18, 2013 at 8:29 am
If vehicles with 100,000 miles or greater are allowed, then they will often times
want to finance for shorter terms, which in turn can impact
your monthly payments. Einige einer Grundbesitzriesen denn DLF,
Puravankara Projekte und Indien Bullen Immobilien sein k.
higkeit, Steuern in den Vereinigten Staaten garantiert weniger als Wertpapiere, die von keinen besonderen F.
95.
minecraft force op | June 27, 2013 at 1:42 am
I was recommended this web site via my cousin.
I’m now not certain whether or not this put up is written by him as nobody else realize such distinct about my trouble. You are amazing! Thank you!
96.
http://www.firstload.com/affiliate/log.php?log=52076 | July 5, 2013 at 5:24 am
Nice weblog here! Also your web site rather a lot up fast!
What host are you the use of? Can I get your associate link
to your host? I desire my site loaded up as
fast as yours lol
97.
Anonymous | July 20, 2013 at 8:31 pm
well written .
98.
Anonymous | November 15, 2013 at 12:32 pm
gud
99. The reforms made Australian Economy Robust | socialsecurityideas | September 17, 2015 at 3:52 am
[…] economy has held up well in the wake of Global economic crisis. When America was reeling under the subprime crisis Australia woke up and made necessary policy changes. The effect of the action is quite evident […]
100.
dipankar nath | July 3, 2016 at 7:55 pm
what a mystery reveals