Upside Down Mortgage

U.s. Subprime Crisis

Question: Explain to me what the Subprime lending crisis effecting the U.S. is all about?

People have suggested that the US is in a Subprime lending crisis, what does this mean?

Answer: The above answers tell you how subprime loans are often variable rate loans given to people with questionable credit, and a lot of them may soon have problems making their newly adjusted higher payments. There's really no point whining about "greed" -- companies that make a living by lending money gradually, step by step, became a little too careless in managing their lending risks; and individuals tend to buy the most expensive house they can get approved for.

Another big part of the problem is that lots of individual mortgage loans are securitized in a secondary market -- meaning groups of them are batched together as the underlying collateral for securities that are then traded by investment firms (the are called CDOs -- collateralized debt obligations).

Because investors are worried that a lot of the underlying mortgages will go into default, those CDO securities have lost value and the market for trading them has dried up -- and no one is sure how much money will be lost on such securities. A lot of companies that engage in such trade depend on being able to sell those securities for cash flow, and so they may have trouble meeting their own liabilities.

Now, compounding the problem a step further, some investment firms make highly leveraged investments on derivatives of these securities. This affects a lot of companies that no one realized would be affected, and threatens an unknown amount of additional losses.

Now, compounding the problem in a different way, because lenders are scared or less able to lend money to people without outstanding credit during this crisis, suddenly the demand for buying houses has declined. Which means house prices have declined in some areas. And THAT is a big problem for people who have mortgages, especially if they are needing to move or trying to sell. Because now if they sell the asset (house), they won't make enough money to pay off the loan (mortgage). So even people who'd have no trouble making mortgage payments suddenly have a huge financial problem.

Now as a side effect of all these specific issues, there may be less demand for everything else in the economy, as people are scared to spend, or less able to spend money. And some amount of consumer spending in the past has resulted from people taking out home equity loans or refinancing their houses, and there is less of that occurring now. The result: recession, job losses etc.

Fannie & Freddie's Fate; U.S Subprime Crisis

If you're new around here, you might want to subscribe to our Upside-Down Mortgage RSS feed. It's quite likely the only feed of it's type on the internet!