urgent! what is the subprime lending issue as related to the stock market?

Question

my coworker just came by to discuss this and i had NO IDEA what he was talking about... anyone help?

Answer 1

Most of the answers are close. It is true that sub prime is a loan that is not conventional. Has higher risk due to poor downpayment, higher percentage of debt to income, and poor credit rating. Many had teaser rates that are now adjusting much higher. People can't refiance because of poor credit, less sub-prime lending, and house deflation in some areas of the country. The effect on the stock market though comes from the paper. Most conventional loans are bundled together and sold as long term investments. So if you have a mortgage, then your bank who prote the mortgage will retain the servicing (collecting your payments, statements, etc.) but the actual loan is funded by investors. These people are generally similar to bond investors. But most subprime loans are held by the institution that wrote them. So if you go bad on a subprime mortgage then the bank is going to get hurt. Since this was big business and subprime is very profitable due to high fees and high interest rates, if the ship start sinking then so do your high profits that can turn to high losses.

Answer 2

this trouble has been brewing for months now. what the sub prime lenders do is have "exocitic mortgages" (usually option Adjustable Rates) and use that to lend money to the riskiest borrowers. But when the feds started raising interest rates the ARMs adjusted upward and thus the people that could afford it before now cannot and foreclousers are looming. Thus when people cannot pay there is an oversupply of houses thus disrupting the home builders and edventually works its way throughout the rest of the economy. One lender doing this will soon declare bankruptcy and has already been delisted by the stock exchange. But now that the news has broke and the feds said today they are closely watching it. The fears of a total market meltdown have drastcally been reduced but the danger is still there.

Answer 3

There was a lot of activity in mortgages and refinancing over the last few years due to the real estate boom. Many of those mortgage loans were made to folks who didn't qualify for a typical 30-year fixed rate mortgage, and so there were a lot of "creative" mortgage funding options out there - adjustable rate mortgages, mortgages with no payments due for several years because they were added on to the back end of the loan, and so on.

Now that the real estate market has started to stall, folks who obtained mortgages based on the equity in their homes may not be able to afford the loans they took out, and could default on the payments. Whenever you have a large group of folks who can't pay back the money they owe, stock market investors get nervous.

The moral is, don't borrow what you can't pay back, and if you can't afford a big fancy house, live in a smaller one. Just make sure it has an extra room for all of your friends who bought big houses they couldn't afford and now want to come and live with you.

Answer 4

the stock market plummeted recently with companies involved mostly in subprime lending (lending to people with less than perfect credit) one company today dropped from $50 a share to 50 cents a share. hope this helps a little