what is sub prime crisis is US market?

Answer 1

simply put there are several factors at work
many borrowers have refinanced thier homes in recent years and got into adjustable rate mortgages or pay option arms
amny borrowers now find themselves unable to make mortgage payments due to the fact that the adjustable rate mortgages they have , have adjusted up thier interest rate to a point that borrowers can make payments (the problem here exists because lenders only qualified the borrowers and the low intraductory rate and not the fully adjustable rate.

complicating things is due to the amount of foreclosures lenders have tightened guidelines and home values have fallen onve the last year. the combination of these factors has put borrowers in a unfinancable position due to either not having enough value in there home to refinance or oweing more than thier home is worth.
I see In the near future the rates coming down and the housing market recovering. once lenders loosen guidelines and the fed lowers the rate i think the market will rebound and things will smooth.
If you are a considering buying a home do soon once the market starts to climb you will be chasing prices and not get as good a deal as you can now!
as far as the rates being a bit higher now buy down the rate as far as you can. after a few years 3 aprox refinance if the rates are lower then. you can always refinacne to a lower rate but noone can make a lower offer once they have bought a home!

Answer 2

The simplest answer to this is that sub-prime relates to people with no, or dubious credit histories being lent money on mortgages. The bansk have done more of this becuase of spiralling house prices - who cares if it's not paid back if you can seize the house and sell it when it's worth 30% more than it was 2 years ago? The banks still get the mone back, was the theory.

the banks are now worried about increasing defaults, and this has lead to the credit crises. This means the banks are now having problems borowing money themselves to cover short term obligations - hence northern rock in the UK being bailed out by a loan from the BoE.

They have a sound business plan, but didnt take into effect the risks inherent in the way they work.

The credit crises has stemmed from the sub prime market, and will possibly reciprocate and add more burden to the financial system.

Answer 3

There were a lot of people with bad credit that wanted to borrow money. To borrow the money, they agreed to a variable interest rate that could get pretty high. It did. The lenders made the loans despite them being high risk, because they were tempted by this ability to get high interest. The loans to people with less than desireable credit was called the subprime market.

It seemed like a good idea, because the long term trend is for real estate to go up in value, so the borrowers figured that (just like the federal government with the National Debt) they could always borrow their way out of a tight spot, and the lenders figured the asset would always go up in value so even if they foreclosed they wouldn't lose money.

The trend, like most trends, didn't continue. There was a long period where real estate values flattened out, revealing what a lot of people already knew, which is that real estate is not a "liquid" investment.

So the borrowers lost their homes and became renters, which they didn't want to be, and the lenders got the houses and became property owners, which they didn't want to be, and despite both situations being foreseen in the loan documents, neither were happy about the situation.

So now you have some groups that want to make the situation worse by encouraging the government to get involved. There's a suggestion that the FHA should guarantee a loan for 125% of the home's value, which would essentially make the FHA a subprime lender, despite the fact that subprime lending is by definition a bad idea, and we now have empirical proof.

Answer 4

sub prime loans were loans given to people who had borderline credit history, and were only approved for a certain rate. These were primarily adjustable rates mortgages, so when the rate adjusted, they could no longer afford the mortgages.

Answer 5

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Answer 6

A lot of common misconceptions are being talked about here.

The Subprime crisis is caused by a lack of money to loan. The last few years, businesses called Origination Lenders have been working through mortgage brokers to market a wide-variety of "creative" loans to Sub Prime borrowers - those with bad credit or high debt-to-income ratios that would make them unable to qualify for normal Conventional Loans. These are not banks.

What they would do is take scores or hundreds of these risky but identical loans, bundle them into security and sell them to investors. The Origination Lenders simply made a commission for originating the loan - receiving the origination "points" as their profit. The Origination Lenders took the money they got from the investors and plowed it into more loans. The more loans they made, the more money in origination fees the lenders received, so they had little concern to how good the loans were, as long as they made a loan, no matter how shaky it was, the originators made money. The investors were talking all of the risk of these loans. The investors were expecting to make money off the interest. The investors were big investment banks, retirement funds, long term money market funds and the like.

Then the investors realized that the loans they were getting were unlikely to make any profit. most had originally low rates to begin and would adjust to much higher rates later. The borrowers would either refinance out of the loan before it raised to a profitable rate , or they would default.

A few months ago investors began realizing how risky and unprofitable these securities were. They stopped buying them. Taken by surprise, many originators like Countrywide and others were left holding unsold mortgages. With their investment pipeline of money cut off, they no longer had money to make SubPrime loans.

In a two-month period the market went from being incredibly easy money for SubPrime borrowers to incredibly tight. Many of the SubPrime borrowers who now need to refinance out of their changing loans have problems finding loans. Also, since the SubPrime market had grown to about 20% of all real estate buyers, we went overnight from a Seller's market - one where there were far more buyers than available houses, to a buyer's market - where there are more houses for sale than potential buyers.

Houses are still selling. Slower than they were in 2006 bu as many as were in 2005 - which itself was a banner year. People are still getting financing. Prime borrowers - about 80% of all buyers - can still get financing without much trouble. But the approaches that have to be taken by buyers, sellers, real estate agents and lenders is much different and most people are slow to change.

Most peoiple don't realize you can still get SubPrime loans. However, instead of going to mortgage brokers - many of which have little sources now for these loans, most smaller loacal and regional banks are doing these loans. They loan off their own money - not off recycled investor money - so they are not effected by this.

So most banks are still going strong for mortages. It is simply tyhe mortgage brokers who specialized inn these crazy loans that are quickly going out of business, and the investors will take a hit on their portfolios.

Out of around 78,000,000 homes in this country, about 2,000,000 (or about 3%) are in dangerous loans that will probably go bankrupt. For the 2,000,000 - it is a horrible situation. But for the market as a whole, 20% of who used to be buyers have been removed from the ability to purchase, this is actually the real problem. People are afraid of this, but it simply means that it is a buyer's market and sellers and buyers and real estate agents need to act like it is 1995, not 2005.

People are worried about all the foreclosures. While that will cause a lot of disruption, that actually will help the market to recover. Right now there are too many houses on the market, making real estate prices stay stagnant or in some areas go down. In foreclosure, a house goes off the market and is vacant for 8-24 months while the legalities are taken care of. So this will cause a DECREASE in homes available to the average buyer - foreclosures as a rule have lots of repair problems as a rule because they are left vacant for many months so only some people are able or willing to buy them - and the lower iinventory of homes for sale will firm prices and calm the market.

There will be a lot of corrections and unrest in real estate for the next 18-36 months, but then people will adjust. Of course, it is a buyer's market now. In real estate, the rule is to buy in a buyer's market and sell in a seller's market.

Answer 7

Lenders making loans to people that cant repay.