What is Sub Prime Crisis and how it effected the stock market downfall ?

Question

I am a non finaance background person but really interested in knowing the SubPrime crisis and its effects. Please mail me on [e-mail]

Hope for an answer soon.

Thaks in Advance....

Answer 1

After the recession in 2000 economy, the controlling agencies like the Fed tried to increase the liquidity by reducing the lending rates; which made the people to invest in riskier investments.  Lenders took on greater risks too, and approved subprime mortgage loans to borrowers with poor credit.   Now the housing bubble blew up and dozens of mortgage lenders declared bankruptcy in a matter of weeks.  This sent a wave of fears in the market called the Subprime crisis.

Answer 2

For the last century, a person had to have a solid job, great credit and a 20% downpayment to qualify for an average 15 or 30- year fixed mortgage.

Within the last 8 years or so, mortgage companies have been offering mortgages to people with less-than-great credit, sometimes no down payment, and an Adjustable Rate Mortgage. An ARM starts at a very low rate- 1-3%, and people can afford the payments. They are aware that within a certain amount of time the interest rate will be adjusted in accordance with the prime rate, and that their interest rate could go up or down.

Well, the moment of truth has arrived. People with no equity (money) in their homes are getting mortgage adjustments of up to 7 or 8%. They can't afford the new payment, and because they had no money down, they owe more on the house than it is worth. People who should have been buying $150,000 homes were qualifying for $300,000 mortgages on the ARM. "Sub prime" refers to their credit rating.

The housing market is depressed, they can't sell and pay off the mortgage and they can't afford the payment. So many just walk away, go bankrupt.

Corrupt and greedy practices in the mortgage industry are to blame, and I expect to see some legislation.

Hope this helps, or contact me.

Answer 3

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