Do you think the sub prime meltdown will further erode consumer credit?

Question

Right now, it's been contained to housing . . . but will it spread to credit cards, car loans, in-store financing (things of that nature)? I'm beginning to think so . . . What do you think?

Answer 1

Absolutely!

I suspect the entire economy will feel a 12-24 month domino effect that will backlash into the disposable income, per capita income, credit, mortgage lending rates, you name it.

Capital One just announced it is shutting down and laying off 1900 employees of its mortgage company. What does that say?

Answer 2

I actually find the whole subprime thing entertaining. I cannot believe that all these "intelligent" bankers could not see the end results of the loans they made. How could they think that they could make a loan to someone with poor credit and then raise the payments and not see a large default approach? I think they were of the mentality of being able to resell these homes at a profit but the housing slump happened and now they are losing their butts.
Credit is truly amazing. You can get it if you do not need it. A few years ago, I could not get a loan of $7000. This money, with what I had, would have paid in full the price of a house. They did offer to lend me $43,000 to finance one.

Answer 3

I seriously doubt it, With mortgage financing, defaults result in foreclosures. Home foreclosures tend to lend themselves to making people rent. These people are then in turn supporting the prime mortgage market vicariously through their landlords. Once the mortgage companies have all their eggs in less baskets, they will re-open their sub-prime markets to lure in more business (baskets). The prime customers are like sure money, the sub-prime are like gambles, once the mortgage companies know they have they expenses covered and are making money, they will gamble with a more lucrative sub-prime customer. By more lucrative, i mean that if a landlord has 100 units, and you were to compare that to 100 sub-prime customers, the sub-prime notes would have a higher intrest rate and make more money. Car loans are a gray area. Since with cars there is always a decreasing equity (in most cases), the incentive for dealerships to charge outrageous intrest rates is diminished (hence the 0% offers you see everywhere). Furthermore, I seriously doubt the sub-prime crisis having negative connotations in the consumer credit (credit card) realm. The penalties imposed and the smaller limits on cards, typically allow the credit card companies to control the amount of risk involved. Because credit limits are based more on credit score, and the amount of money involved on sub-prime mortgages is based more off of income, the risk varies a lot more in the sub-prime market. They are not neccesarily related and should not have effects on each other.

Answer 4

The crisis is primarily in the institutions that buy mortgage paper.

With the problems in the subprime market, they are no longer confident that they can put an accurate value on the blocks of mortgage paper that they buy.

I predict that the purchasers of mortgage paper will regain their confidence and start purchasing mortgage paper of people ith good credit histories and good employment and income histories that is well documented.

The days of easy credit for people with credit histories or income that is difficult to document are over, however

.

Answer 5

In finance, anything that causes a crisis in confidence in one area, affects confidence in all. Apart from that, when lenders get burnt they have to secure their profits by reducing their exposure (less credit available) and increasing their charges (higher interest rates).

Answer 6

Sure! A debt is a debt is a debt.