What is Subprime Crisis? How to solve the subprime crisis?
The current Subprime crisis is not really a crisis due to over lending of banks, but situation created due to sub prime lending. Banks don’t have enough money to lend money. We will start with subprime lending.
What is sub prime lending?
The term “subprime” refers to the credit status of the borrower (being less than ideal), not the interest rate on the loan itself. “sub prime” is any loan that does not meet “prime” guidelines. If your mid fico score is below 620 and you have any mortgage rates within 12 months or recent BK/foreclosure, you are considered “sub prime”.
Subprime lending, also called B-paper, near-prime, or second chance lending, is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. The phrase also refers to paper taken on property that cannot be sold on the primary market, including loans on certain types of investment properties and certain types of self-employed individuals. Subprime lending is risky for both lenders and borrowers due to the combination of high interest rates, poor credit history, and adverse financial situations usually associated with subprime applicants. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. (wikipedia ).
What about lending rates?
To avoid the initial hit of higher mortgage payments, most subprime borrowers take out adjustable-rate mortgages (or ARMs) that give them a lower initial interest rate. But with potential annual adjustments of 2% or more per year, these loans can end up charging much more. So a $500,000 loan at a 4% interest rate for 30 years equates to a payment of about $2,400 a month. But the same loan at 10% for 27 years (after the adjustable period ends) equates to a payment of $4,470. A 6-percentage-point increase in the rate caused slightly more than an 85% increase in the payment.
1 comment:
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