Whats the sub-prime and what it's influences?

Question

Whats the sub-prime and what it's influences?

Answer 1

Sub-prime lending is making loans to people with a dodgy credit rating. Because it's riskier to lend to these people (they're more likely to default or delay payments or go bankrupt), the interest rates have to be higher. This is the normal risk vs. reward tradeoff.

Banks have traditionally avoided sub-prime lending, leaving it to loan sharks and the like. However, it now turns out that due to complex parcelling-up of mortage debt, a lot of US and international banks are exposed to risks that they didn't realise were nearly so bad.

This has caused a rumpus and a liquidity crisis, because no bank wants to lend to another bank that's about to go bust! Basically it's lack of confidence among bankers. The central banks (government owned) are doing what they can to calm things down and restore confidence by pumping money into the system.

Answer 2

There is a prime lending rate the banks charge each other. When a bank charges less than this from its customer for certain operations like housing loans. There should be a way that the deficit is recouped. Normally this is done in a cash rich situation to employ idle cash for a short term business. But the time schedules are tight and there can be no margin for default. The situation is aggravated when the collateral turns out to be of less worth. It happens when sound banking principles are relaxed opening scope for a little speculation on the part of the borrower, who feels he can get away without the asset without a scratch. Then the bank is saddled with house or property that may not find a ready buyer as the market is depressed.

To compound the matter, the bank sells its rights to recovery agents for a little less price than the prime rate. This agent may sell the business to a sub-agent at even lass rate till the fellow actually recovers. This way the risk is distributed over more than one person (party) and the blow to the individual is minimised. But the bank will only post less profit for the period.

In India, where public sector banks (controlled by government) offer such services as a government welfare measure with the government at times disbursing the differentals. Or else the bank suffers loss and the government which has 51% or more stake will own the loss and reflect the same as expenditure on welfare measure. This way it is charged to the tax payer inadvertently.

Answer 3

the subprime crisis means the crisis due to the subprime loans. The subprime loans were loans given to people non totally reliable to give back the money to the bank. In addition some banks re-sell this loans to other banks, giving them the ownership of the loan and having from the bank money for this reason.

Last year some people not reliable started not to pay the loan to the bank and so started the crisis. Now banks don't trust more in giving credit to the people and banks don't trust each other because nobody knows how much is the value of this subprime loans. The conclusion is that there is not more credit, the house industry is in crisis, there is more unemployemet and the consumers are scared. It's a big messy

Answer 4

Subprime mortages are/were geared towards people who could not apply for typical mortgages.