Subprime and the Subsequent Crash

Customers who are in poor health tend to have poor credit scores. Commercial banks will not loan money to customers with poor credit histories. If the credit-risk clients wish to buy homes and other property, only subprime lenders will to lend them loans at insane interest rates. Someti

Subprime loans are actually sub-prime. It's a lower level than "Prime" loan.

Customers who are in poor health tend to have poor credit scores. Commercial lending usa banks will not loan money to customers with poor credit histories. If the credit-risk clients wish to buy homes and other property, only subprime lenders will to lend them loans at insane interest rates. Sometimes, the rates can be up to 22 percent.

Customers with good credit can obtain mortgage loans between 5 and 7 %. Customers with bad credit will end up less secure if they continue to pay 22% to loan sharks, except if the value of their home increases. Customers with poor credit are at a danger of paying the 22%, believing that they will be able to sell their house at an income.

If subprime lenders loan customers at risk of credit but they don't retain the loan. After a couple of months, they bundle many loans into securities and then sell the securities to financial institutions.

Banks aren't able to loan money to customers with credit risk. In contrast, they purchase subprime securities of subprime lenders.

If poor customers fail to pay their loans, it triggers a domino impact. If one or two people who default and it's not a huge issue. When there's thousands of defaults it's a huge mess.

This week, it happened at Wall street.

The market started to show signs of subprime fear as HSBC Finance, consumer lending part of British bank big HSBC Holdings said it was saving 20 percent more than analysts predicted of bad credit loans for 2006 as a result of the weakening of the U.S. mortgage business. The shares of the bank went on the plunge.

The worst news of the week was reported by Irvine located bank New Century Financial. New Century, the second-largest subprime mortgage lender across the U.S., announced it would revise figures for the three initial quarters of 2006 to fix the accounting mistakes that led to loss on loans repurchases and sent the stock lower by 30% on February. 8. New Century expects an operating loss in its fourth quarter in 2006 due primarily to early payment defaults.

These subprime lenders are aware of the real risk of lending to customers who are at risk of being credit-risk. They are still able to lend the money because their business is profitable. Who else is willing to take 22 percent? !

Ram is the author of numerous pieces that discuss Personal Finance and Business. You can read his articles at Commercial Lending USA


Robert Watson

5 Blogs posts

Comments