What is meant by "sub-prime"?

Question

I don't understand the issue about sub-prime rates and why its affecting the stock market.

Answer 1

In this case it applies to people that given interest only loans because they couldn't afford to make a down payment. The interest was not fixed so the interest could go up or down. The interest rates went up and the worth of the houses went down. That is called being upside down on the payments. People stopped paying their loans which caused the lenders to go under (because they took out loans to make loans and now had no way to pay back their loans). Some of the money can be made back through reselling the property, but someone has to pay the difference between what the property was worth and what it sold for in foreclosure and what payments were made before the foreclosure.

Even the people that are still paying can't use their equity because they are also upside down and so they have less cash to spend.

Answer 2

Sub-prime describes the types of interest rates on home and auto loans, personal loans, and credit cards for those who have either less than average credit ratings or who have a high debt to income ratio. This area of the lending market has it woes as much as the normal lending market according to Money magazine. The default rate is higher typically so the lenders increase the interest and include pre-payment penalties. However, the good news is many who begin in the sub-prime market, after a few years of regular payments, can count on getting better rates. Anyone with bad credit had good credit at one time and so sub-prime adjusts for that **** the causes of which may include unemployment, illness or injury, and of course, poor financial management. As for the stock market impact, it is whimsical and based upon projections that often change in six months, which is why the market is always volatile. There are more defaults with sub-prime lenders and the percentage of sub-prime loans has risen to 13.5% in 2006 from 2.6% in 2002. This is all caused by people living beyond their means and lenders who were not as diligent with loan applicants, especially verifying income. This is pretty surprising but as the bad news continues, it makes mortgage security investors very alarmed.

Answer 3

Before we talk about sub-prime, let's talk about prime. In banking lingo, prime borrowers are corporate borrowers who are considered to be the least risky (healthy balance sheets, strong ability to generate cash flow, long and positive credit history, etc.) Borrowers that are lacking some or all of the above are referred to as sub-prime.

Sub-prime rates are important because a lot of companies out there borrow at those rates. An increase in sub-prime rates means that sub-prime lenders will face higher cost of borrowing, which will negatively impact their bottom line. So the stock prices fall in anticipation of that...

Answer 4

sub prime is loans to ppl with bad credit..market is falling coz most of them cannot pay up and now the company that gave this loans has some obligations to pay up which unfortunately they are unable to because they havent received their money from teh people with bad credit....since huge companies have this problem this becomes an issue..also, the weakness in the housing market means a lot to the us market in general..when you buy a house, you boost the economy coz you need all these supplies...this is not the most technical but just trying to make it easy to understand

Answer 5

persons with "less tan perfect credit" is a term many lenders use. The market is not buying many of these notes now as to poor performance and shabby underwritings as well as out and out fraud.