Subprime Mortgages?

[jingjingna]

Please help me understand the meaning of a 'Subprime' mortgage as being a Brit, I have no idea what it stands for...

[sbk]

Is there a reason you are posting it in the teaching forum???

[jingjingna]

Absolutely Sbk,

This is American terminology and this questions was put to me by one of my students and I had/have no idea what it means. That is why I am posting here, in hope that one of the American board members might be able to assist me with an explanation that I can pass on to my student.

So, the question still remains..what is meant by 'subprime mortage' in America. My student was referring to a very recent article in USA TODAY regarding real estate or the property market as us Brits would say...Thanks in advance for your help in explaining this to me guys.

[ukjackthai]

I found 3 definitions...

Credit with higher risk characteristics, such as bankruptcy or collection accounts.

A term referring to borrowers with a less-than-perfect credit history, also called B&C credit.

Industry term used to describe credit and loan products that have less than stringent lending and underwriting terms and conditions. As a result of the higher risk, subprime products charge a higher rate of interest.

[jingjingna]

Thank you ukjackthai...that's just what I wanted explaining..thank you once again.

[mbkudu]

If you break the word down, it is something like this: sub=below and prime=the desired level. 'Prime' interest rates are reserved for borrowers who have unblemished or very good credit history. They will get better/lower rates. A 'subprime' is for the borrowers who are chancers and have had things repossessed or defaulted on bad loans, ect. Their rates are higher and usually unfixed mortgages. Banks love people like this because when the shit hits the fan, they can snatch their houses, hold on to them, and then resell them into the market when times are better.

[jingjingna]

Thanks to you too mbkudu. Interesting news and quite horrifying too, especially for those who then 'enter' the subprime category, but that is a topic in it's own right.

[PeaceBlondie]

The term relates to big news currently in global finance, because almost every financial institution appears affected by the meltdown in these American mortgages. Keep in mind, common sense for 100 years said there was nothing more sound than a first mortgage on American residential, owner-occupied real estate. The lenders got overly greedy in recent years, issuing shaky mortgages with little or nothing down, and no interest or extremely low interest, to people with bad credit history and shaky income levels. It's come crashing down at a time when the real estate market (residential homes) has ground to a halt (no more increases, some significant decreases in appraised value). The freight train has already hit, but several more trains are scheduled to collide very soon as ARM"s (adjustable rate mortgages) hike the effective interest to levels that these shaky homeowners cannot pay. A giant German bank recently lost a repossession lawsuit because they couldn't produce the title and mortgage to the delinquent house owners they were trying to evict.

It may be the start of the worst financial crisis since Cro Magnon Man started painting on caves. Or, it may not be.

Class dismissed. No charge for the lecture.

[mbkudu]

PB, wouldn't you agree that this is how banks and lending institutions thrive? They cry foul about their losses on bad loans, but in fact they win when the housing comes back up again. I suppose the only thing that could keep the US housing market down for good is global warming. Places like Florida will no longer exist.

[LaoPo]

Please help me understand the meaning of a 'Subprime' mortgage as being a Brit, I have no idea what it stands for...

You're a Brit ?

Watch this and you'll know what and how sub prime functions and what it is NOT.

Humoristic as only the Brits can but............scary:

How the markets really work

http://www.brasschecktv.com/page/187.html

Might be a good lesson to show your students...

LaoPo

Edited November 29, 2007 by LaoPo

[PeaceBlondie]

PB, wouldn't you agree that this is how banks and lending institutions thrive? They cry foul about their losses on bad loans, but in fact they win when the housing comes back up again. I suppose the only thing that could keep the US housing market down for good is global warming. Places like Florida will no longer exist.

I don't know. I'm a financial lightweight, compared to guys like LaoPo. But when a financial powerhouse like Goldman Sachs is facing losses that effectively bankrupt them, and Citigroup has to pay 11% on a loan from the Saudi oil shieks, even the big boys could be in for trouble. In the long run, a company with a trillion dollars of assets will keep going, whereas a mere 55 billion dollars might not be enough to stay alive.

I doubt many of us have students who will want to know the details of the subprime mortgages. We might just say a couple of short sentences, like "Banks in America lent too much money to Americans who cannot pay for their homes. Now, big companies may go out of business and many people will lose their homes."