Money To Live

August 7, 2008

The subprime mess

Filed under: banks,credit — by moneytolive @ 5:00 am
Tags: , , ,

house

Financial markets have been reeling for months after large losses in subprime mortgages. My take on the subprime mess is that too much credit went to too many people too easily.

  • Individuals qualified for more credit by taking out an ARM (adjustable rate mortgage) than they could have borrowed with the more traditional 30-year FRM (fixed rate mortgage).
  • Lending was extended more readily to “subprime” borrowers. A subprime borrower has a lower credit score, which indicates he may not have used credit carefully in the past (many late payment, etc.).
  • Some lending institutions required little or no documentation. Joe Shmoe could walk in off the street and claim an income of $100,000, qualifying him for a larger mortgage than his $60,000 income could actually afford.

Now some of these people cannot pay their monthly mortgage — a larger number than was anticipated by the housing and mortgage experts. ARM interest rates can reset to higher values, and, ahead of time, no one knows quite how high (or low) the rates will reset.

Because a lot of these people’s homes are being foreclosed, more houses are on the market. Also, because banks have made it harder to qualify for a mortgage without a substantial down payment and strong credit history, there are fewer buyers. With more supply than demand, housing prices are heading lower.

With so many bad loans, lenders are being pickier about who gets money, affecting large corporations, small businesses, individuals and families, and students.

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