What is sub prime crise?how it happens?what is situation now?

Question

i want to know about sub prime crises,for example mortgage crise?what is meant by it simply?

Answer 1

Put as simply as possible, the sub prime lending crisis is:

a) The US had lots of money floating around its economy, looking to be invested for a return.

b) The priority was to get this money invested - so it was 'lent' out to as many people as possible.

c) The pool of perfect loan candidates soon expired... but the banks needed to keep the home loans ticking over, so they relaxed their lending criteria to lend money to people who wouldn't normally be approved for home loans (this non-A grade home loan is called a subprime loan)

For example: Some people were approved loans when they didn't have jobs. Some people were approved loans for 125% of the value of their houses (I.e they got the home plus 25%). Many were told that they didn't have to make repayments for two or more years.

d) People who took out a subprime loan lived blissfully in their homes, without a care in the World, as they didn't need to make any payments.

e) Then the date came where they needed to make a payment... and they couldn't afford to. So they had to sell their home. The only problem was that their neighbour had to sell too... and their other neighbour... and the rest of their street.

f) Since there was a big influx of people needing to sell, the price of the properties fell sharply. Banks rely on their secured house prices to rise, so they can recoup their money in the event of a foreclosure.

g) So in some cases (well more than 18 million homes and rising) the total loan amount now exceeded the value of the home. So there's no point in staying in the home and paying it off.

h) In the US you are legally allowed to walk away from your home... and the debt is the banks problem (We can't do this in Australia). So, as each person left their home, the banks losses on their investments became realised. The banks are literally choking with bad home loan debt.

The situation now is one of 'what's going to happen next?' The US economy is still very much waiting to see if its stockmarket is going to fall. It's kind of a waiting game. Even Warren Buffett (arguably the World's best invester) questions whether we are even a 1/3 the way through the crisis.

Banks have now had to introduce more stringent lending criteria to reduce further losses.