The Effects Of Sub-Prime Lending In The US

In recent years it has been easier to get a loan or credit to fund a new car or whatever else you fancied. But now it's all changed and times are definitely harder. The change started when the number of repossession of homes in the US suddenly started to rise during autumn 2006. The effect of this has had a knock on effect across the world and sparked a global financial crisis in 2007.

The crisis came about when people in the States started to default on mortgage payments that they could no longer afford. Due to the relatively high level of prosperity banks had been lending money to people who had poor credit histories and were considered high risk. In order to minimise the risk banks, charged higher interest rates for these loans to ensure that they would get the cash back. Borrowers began realising that lenders were open to them, and were enticed by the rise in housing prices, so took out a mortgage to get on the property ladder. However in 2006-2007 housing prices in the US started to fall which has lead to a difficulty in re-financing homes for more favourable rates. People were therefore stuck with expensive mortgages that they just could not sustain over the long term.

Mortgage defaults were quickly responded to with repossessions, and people started to lose their homes. By October 2007 the rates of repossessions were three times higher than the number in the same month of 2005. By January 2008 this had risen even steeper by another 5%. During the whole of 2007 1.3 million homes in the US were repossessed, leaving the banks with a deficiency of between $200 and 300 billion dollars.

This all had a big effect on the American stock market which in turn negatively influenced economies around the world. The banks suddenly did not want to lend money any more to anyone that could be considered higher risk and heavy lending restrictions were put in place. This has transferred over to the UK where the number of house repossession in the last year has also risen. However sub-prime lender in the UK accounts for only 6% of all lending where as in the US it accounts for 20%. Despite this there have been heavy crackdowns who is eligible to be lent money.

The banks are in part to blame for this crisis, with the Financial Services Authority (FSA) taking action against 5 brokers, after their review of the mortgage market last year. In addition the FSA found out of the 34 brokers they monitored one third failed to properly assess if the consumer could actually afford the loan. Consumers were being asked to fill out self certification forms stating their income, but no further checks were made to validate these figures. Consumers wanting to borrow more money to keep up with the ever increasing prices of the house market may be tempted to inflate their earnings just to get on the ladder without thinking about the consequences.

The situation we have now been left with in the UK does look bleak. Mortgages are harder to obtain and have higher rates, however this may prompt a slowdown in house prices rising which would help more people actually be able to afford their own home.

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The Credit Crunch - Why it Happened

We have all been witness to some pretty incredible events over the last couple of months that appear to have generated a new phrase in our language, "The Credit Crunch". We can see the effect in the failures of our financial and retail institutions but the question of why it happened, and what we can learn from it, seems less clear.

In December I was sent a link to a seminar given at Harvard University on the 25th September 2008 called "Understanding the Crisis in the Markets" in which a panel of experts from Harvard University do their best to get to the bottom of the problem.

Presenting the seminar was a panel of six experts including; Jay Light the Dean of the University, Rob Kaplan a Professor of Management Practice, Elizabeth Warren a professor of Law, Greg Mankiw, a professor of Economics, Keneth Rogoff a professor of Public Policy and Robert Merton a winner of the Nobel Prize for Economics.

The genesis of the problem appears to revolve around a phenomenon called leveraging. Briefly, if I own my house then it has a value. I can realise that value by selling the house, but then I would not have anywhere to live, so I have to buy another house and have not really achieved anything. Or I can take out a loan against my house, then I will have somewhere to live, and the money. I have leveraged my house. As long as I am able to continue making the payments on the loan the system works.

The breakdown in the system, as described by the panel, started as early as 10 years ago in the United States when mortgage brokers became tired of the boring old system of carefully assessing peoples ability to repay mortgages and instead started to look for ways that they could make more money from their sale. One of the ways they came up with was what was called a "Teaser" rate in which the sale of a mortgage was assessed on the ability of the buyer to make payments on a low introductory rate which lasted typically two years, and not on their ability to pay the other 28 years of a 30 year mortgage, at double the teaser rate. At the same time the mortgage companies were spreading their risk around other financial institutions by repackaging and selling their mortgage-loans to them. They were therefore less concerned about buyers defaulting on their loans when the higher rate kicked in because they were no longer lending their own money.

With more money available house prices started to increase and this led to the ratio of average house prices to average wages rising in America from something like 2.8:1 to over 4:1. In the UK that Ratio exceeded 6:1 as house prices rocketed and the mortgage companies looked for new ways to sell mortgages.

This was not sustainable in a flat market, but the world was in growth, corporate profits reached record margins, property prices were increasing and the market was being sustained, for a while.

Meanwhile wages were stagnant in real terms while living costs continued to rise, making it increasingly difficult for homeowners to make ends meet. For many the only way out was to take a second job. Then the homeowners discovered their ability to remortgage, or leverage, their homes to release their capital.

While property prices continued to increase this was fine because when the teaser rates on the remortgage ran out the property had increased in value sufficiently to remortgage again. This release of capital masked the fact that middle class America was having an increasingly difficult time funding their lifestyles from their wages.

A point to note is that the perception of these "Sub Prime" mortgages is that they were supplied to the poorer sections of the community to get them on the housing ladder. In fact over 80% of these loans were remortgages sold to existing borrowers - the home owning American middle class.

Then house prices stopped rising.

Now when the teaser rates ended there was no more equity to be released and the homeowner was left with a huge debt and no way to pay it off.

In the meantime the mortgage companies, well aware of the problems they were stacking up, had spread the risk of their loans throughout the financial community by taking out loans on their loans, or leveraging, so that ownership of the mortgage was spread around in a very complex way that only works in an expanding market, or while the release of equity continues to fund expansion,

When the release of equity dried up nobody could afford to repay their loans. Not the house owners, nor the financial institutions.

The complex relationships of the worlds financial institutions and the global nature of their business has ensured that these effects are being felt around the world.

The discussion finished with questions from the floor, one of which suggested that the current crisis might be dwarfed if the problem of over leveraging is not solved before the next round of Teaser mortgage rates expire.

The panel of six experts agreed that the answer was not going to be easy to find.

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The Credit Crunch - Why it Happened

We have all been witness to some pretty incredible events over the last couple of months that appear to have generated a new phrase in our language, "The Credit Crunch". We can see the effect in the failures of our financial and retail institutions but the question of why it happened, and what we can learn from it, seems less clear.

In December I was sent a link to a seminar given at Harvard University on the 25th September 2008 called "Understanding the Crisis in the Markets" in which a panel of experts from Harvard University do their best to get to the bottom of the problem.

Presenting the seminar was a panel of six experts including; Jay Light the Dean of the University, Rob Kaplan a Professor of Management Practice, Elizabeth Warren a professor of Law, Greg Mankiw, a professor of Economics, Keneth Rogoff a professor of Public Policy and Robert Merton a winner of the Nobel Prize for Economics.

The genesis of the problem appears to revolve around a phenomenon called leveraging. Briefly, if I own my house then it has a value. I can realise that value by selling the house, but then I would not have anywhere to live, so I have to buy another house and have not really achieved anything. Or I can take out a loan against my house, then I will have somewhere to live, and the money. I have leveraged my house. As long as I am able to continue making the payments on the loan the system works.

The breakdown in the system, as described by the panel, started as early as 10 years ago in the United States when mortgage brokers became tired of the boring old system of carefully assessing peoples ability to repay mortgages and instead started to look for ways that they could make more money from their sale. One of the ways they came up with was what was called a "Teaser" rate in which the sale of a mortgage was assessed on the ability of the buyer to make payments on a low introductory rate which lasted typically two years, and not on their ability to pay the other 28 years of a 30 year mortgage, at double the teaser rate. At the same time the mortgage companies were spreading their risk around other financial institutions by repackaging and selling their mortgage-loans to them. They were therefore less concerned about buyers defaulting on their loans when the higher rate kicked in because they were no longer lending their own money.

With more money available house prices started to increase and this led to the ratio of average house prices to average wages rising in America from something like 2.8:1 to over 4:1. In the UK that Ratio exceeded 6:1 as house prices rocketed and the mortgage companies looked for new ways to sell mortgages.

This was not sustainable in a flat market, but the world was in growth, corporate profits reached record margins, property prices were increasing and the market was being sustained, for a while.

Meanwhile wages were stagnant in real terms while living costs continued to rise, making it increasingly difficult for homeowners to make ends meet. For many the only way out was to take a second job. Then the homeowners discovered their ability to remortgage, or leverage, their homes to release their capital.

While property prices continued to increase this was fine because when the teaser rates on the remortgage ran out the property had increased in value sufficiently to remortgage again. This release of capital masked the fact that middle class America was having an increasingly difficult time funding their lifestyles from their wages.

A point to note is that the perception of these "Sub Prime" mortgages is that they were supplied to the poorer sections of the community to get them on the housing ladder. In fact over 80% of these loans were remortgages sold to existing borrowers - the home owning American middle class.

Then house prices stopped rising.

Now when the teaser rates ended there was no more equity to be released and the homeowner was left with a huge debt and no way to pay it off.

In the meantime the mortgage companies, well aware of the problems they were stacking up, had spread the risk of their loans throughout the financial community by taking out loans on their loans, or leveraging, so that ownership of the mortgage was spread around in a very complex way that only works in an expanding market, or while the release of equity continues to fund expansion,

When the release of equity dried up nobody could afford to repay their loans. Not the house owners, nor the financial institutions.

The complex relationships of the worlds financial institutions and the global nature of their business has ensured that these effects are being felt around the world.

The discussion finished with questions from the floor, one of which suggested that the current crisis might be dwarfed if the problem of over leveraging is not solved before the next round of Teaser mortgage rates expire.

The panel of six experts agreed that the answer was not going to be easy to find.

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Bad Credit Mortgage Tides Over A Poor Credit History

Applying for a mortgage or a home loan is fraught with difficulties. You need to have a good credit history if you want your loan application process to be completed smoothly. But, for those with a bad credit history, don't dash your hopes just yet. The rise of such cases has seen the emergence of a whole new market catering to the needs of people with adverse credit histories. A bad credit mortgage will help you get all the benefits of other types of mortgages even if you have a not-so-perfect credit history.

Before going for a bad credit mortgage, you must identify your credit history. It is best that you get a tri-merged credit report, in addition to your credit scores. These scores determine an individual's credit worthiness. Generally, a bad credit history is any credit score, which is less than 620. If you have an adverse credit history, you must go for bad credit mortgage. A bad credit mortgage is tailor made for those who have a poor credit history and is also known by other names like adverse credit mortgage, sub-prime credit mortgage, non-standard mortgage, poor credit mortgage, and credit-impaired mortgage.

The factors that contribute to an unfavorable credit history can be many but the more prominent amongst them are rent arrears, judgments doled out at county courts, bankruptcy, I.V.A, trust deeds, and in some countries various decrees also contribute to a person having an irregular credit history.

There are some lenders who turn down prospective borrowers even if they have changed their address on numerous occasions. These and many other reasons have seen the rise of sub prime lenders. They cater to the requirements of people with a poor credit history and give bad credit mortgages. As the name suggests, they are lenders who lend money to borrowers who have been turned down by mainstream lenders. As there is a demand for bad credit mortgages, many mainstream lenders have authorized affiliates who offer bad credit mortgages. It is advisable that they are at best avoided as you increase the amount of risks that you are taking.

But in the end you must understand that lending money is risky business. Mainstream banks charge very high interest rates, if they offer a bad credit mortgage. Most of the lending organizations are very strict about lending money to high-risk category borrowers. They do want to minimize the associated risk and hence they adjust the rates accordingly. You must take due cognizance of the associated risks but not forget the positives of bad credit mortgages. At the end of the day, you get a house that you can call your own. And after you have made regular payments and finally repaid the whole loan, your credit history will see a tilt towards the better. This allows you to enjoy the benefits of remortgage, under the aegis of which you can change your lender. From the mean streets, you can jump to the high street.

When you take bad credit mortgage, your final aim must be to make an upward climb from adverse credit history to a positive credit history. From, no property, to ownership of property!

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Bad Credit Mortgage Tides Over A Poor Credit History

Applying for a mortgage or a home loan is fraught with difficulties. You need to have a good credit history if you want your loan application process to be completed smoothly. But, for those with a bad credit history, don't dash your hopes just yet. The rise of such cases has seen the emergence of a whole new market catering to the needs of people with adverse credit histories. A bad credit mortgage will help you get all the benefits of other types of mortgages even if you have a Not so perfect credit history.

Before going for a bad credit mortgage, you must determine your credit history. And 'better that you get a credit report tri-fusion, in addition to the score of credit. These values determine the creditworthiness of the individual. Usually a bad credit history with credit scores below 620 if you have a bad credit history you must go to the bad mortgages. A bad credit mortgage is tailored to those who have a poor credit history and isGuides and other famous names such as credit negative - First-mortgage credit, non-standard mortgage and mortgage-Bad credit, credit impaired loans under sub.

Factors that may contribute to adverse credit history are many, but the most important among them are rent arrears, distributed convictions in district courts, bankruptcy, taxes, deeds of trust, and to contribute in some countries, decrees Several also help a person with an irregular credit history.

There are somecredit providers, in turn, potential borrowers, even if they have changed their address once. These and many other reasons have seen the rise of sub prime lenders. Takes care of the needs of people with a history of poor credit and give loans bad credit. As the name suggests, are banks that lend to that has been identified by traditional lending institutions on. Because of the demand for loans bad credit, credit institutions approved many mainstreamAffiliates that offer bad credit loans. It 'should be better as it increases the amount of risks you take, be avoided.

But in the end you have to understand that a loan is risky. Mainstream banks charge high interest rates when they offer a bad credit mortgage. Most credit unions are very strict about lending to high-risk borrowers. You want to minimize the risks associated with changing prices and soaccordingly. You must pay due attention to the risks involved do not forget the positive side of bad credit mortgages. At the end of the day you get a house called his own. And after regular payments and has finally returned the loan in full, your credit history is a tendency for the better. This allows you to remortgage, you can enjoy the benefits under whose auspices your lender, you can change. Mean streets, you can jump on the High Street.

Whenyou take bad credit mortgage, your final aim must be to make an upward climb from adverse credit history to a positive credit history. From, no property, to ownership of property!

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Subprime Mortgage Lending - What's Wrong With It?

For the past couple of years, it seems that every time you open a newspaper or turn on the television, you come up against the subject of subprime lending. Everyone seems to have something negative to say about it. You'd think it was the root of all evil!

It's true that subprime lending has many things about it that are not especially positive. For example, for whom was subprime lending designed? For the subprime, not-quite-good-enough borrower, of course. Often, the person who finds it necessary to borrow at subprime is the person whose credit rating is a bit tarnished, and therefore someone who is considered more likely to default on the loan. Subprime lenders generally specialize in this area. They tend to charge more, both in fees and in interest rates, to make up for the increase in risk of default.

How did we allow this to happen? It has a lot to do with greed. Borrowers were greedy, and wanted a way to buy houses they really could not afford. Subprime lenders and mortgage brokers were greedy, and offered mortgages to people they knew shouldn't be borrowing money at all. Add easy-to-access money and low interest rates into the mix, and it's a disaster waiting to happen.

Once upon a time, not so long ago, you could borrow on the equity in your home - an amount equivalent to 125% of its value. While interest rates were low, many people began refinancing their homes, or taking out lines of credit and loans on their home equity. At the same time, American real estate markets were growing faster than ever before. These individuals figured it would be easy to sell their homes, or refinance again, if they wanted to. Such extravagant growth led to a sudden, but inevitable, decline in the housing market.

At this point, these people are in a real bind. They are unable to sell their houses: the value is nowhere near the amount of the mortgages they hold. They are in a position of negative equity: that is, the mortgage is more than the value of the house, and their savings are insufficient to fill the gap. They may have an adjustable rate mortgage (ARM) that escalates regularly. That's a whole lot of trouble for a whole lot of people! Foreclosures on homes are at a record high. These foreclosures will make the situation even worse, as houses are sold at auction for a fraction of their full market value.

There are several other kinds of subprime loans out there that may look tempting to a borrower who has no money for a deposit. An 80/20 mortgage is one of these. This one is the epitome of greed; no borrower with an ounce of financial responsibility should even consider these loans. Eighty per cent of the asking price is borrowed through a conventional fixed-rate mortgage or an adjustable rate mortgage. Then you borrow the remaining 20% of the price as a loan on your home equity. The rate of the latter mortgage will be higher. The lender can decide to readjust some of these mortgages on a whim. Negative amortization mortgages and interest-only mortgages are also motivated by greed. Both types benefit only the lender, not the borrower; as time goes by, the loan just gets bigger. Although monthly payments are not too large during the five-year or ten-year term of the loan, none of the principal has been repaid, and there is an enormous "balloon payment" awaiting the borrower when the term ends.

These are a few of the things that are wrong with subprime lending. Keep an eye out for mortgage plans that actually are of greatest benefit to the lender!

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Subprime Mortgage Lending - What's Wrong With It?

For the past couple of years, it seems that every time you open a newspaper or turn on the television, you come up against the subject of subprime lending. Everyone seems to have something negative to say about it. You'd think it was the root of all evil!

It's true that subprime lending has many things about it that are not especially positive. For example, for whom was subprime lending designed? For the subprime, not-quite-good-enough borrower, of course. Often, the person who finds it necessary to borrow at subprime is the person whose credit rating is a bit tarnished, and therefore someone who is considered more likely to default on the loan. Subprime lenders generally specialize in this area. They tend to charge more, both in fees and in interest rates, to make up for the increase in risk of default.

How did we allow this to happen? It has a lot to do with greed. Borrowers were greedy, and wanted a way to buy houses they really could not afford. Subprime lenders and mortgage brokers were greedy, and offered mortgages to people they knew shouldn't be borrowing money at all. Add easy-to-access money and low interest rates into the mix, and it's a disaster waiting to happen.

Once upon a time, not so long ago, you could borrow on the equity in your home - an amount equivalent to 125% of its value. While interest rates were low, many people began refinancing their homes, or taking out lines of credit and loans on their home equity. At the same time, American real estate markets were growing faster than ever before. These individuals figured it would be easy to sell their homes, or refinance again, if they wanted to. Such extravagant growth led to a sudden, but inevitable, decline in the housing market.

At this point, these people are in a real bind. They are unable to sell their houses: the value is nowhere near the amount of the mortgages they hold. They are in a position of negative equity: that is, the mortgage is more than the value of the house, and their savings are insufficient to fill the gap. They may have an adjustable rate mortgage (ARM) that escalates regularly. That's a whole lot of trouble for a whole lot of people! Foreclosures on homes are at a record high. These foreclosures will make the situation even worse, as houses are sold at auction for a fraction of their full market value.

There are several other kinds of subprime loans out there that may look tempting to a borrower who has no money for a deposit. An 80/20 mortgage is one of these. This one is the epitome of greed; no borrower with an ounce of financial responsibility should even consider these loans. Eighty per cent of the asking price is borrowed through a conventional fixed-rate mortgage or an adjustable rate mortgage. Then you borrow the remaining 20% of the price as a loan on your home equity. The rate of the latter mortgage will be higher. The lender can decide to readjust some of these mortgages on a whim. Negative amortization mortgages and interest-only mortgages are also motivated by greed. Both types benefit only the lender, not the borrower; as time goes by, the loan just gets bigger. Although monthly payments are not too large during the five-year or ten-year term of the loan, none of the principal has been repaid, and there is an enormous "balloon payment" awaiting the borrower when the term ends.

These are a few of the things that are wrong with subprime lending. Keep an eye out for mortgage plans that actually are of greatest benefit to the lender!

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