The Sub-Prime Mortgage Crisis
The Sub-Prime Mortgage Crisis
Jordan Goodman (Personal Finance Author) gives expert video advice on: How is the sub-prime mortgage crisis affecting the economy?; Why did banks give mortgages to people who couldn't afford them?; How does the sub-prime mortgage crisis affect the average American?
How is the sub-prime mortgage crisis affecting the economy?
The sub-prime mortgage crisis is affecting the economy in major ways. What was happening was, people in the past who would not have gotten mortgages and not been able to buy homes did get mortgages in the early 2000's. And not only did they get mortgages but they got them at below market interest rates, they were getting two and three and four percent that would then adjust up to the market in two or three or four years. And that's what's happening now, is these resets are happening and people are not able to make these higher payments and therefore they're losing their homes. And there's a tremendous amount of delinquency and foreclosure going on in the housing market. That not only affects the people who are getting foreclosed upon and losing their homes, but if the value of their homes are falling it can mean the entire neighbourhood can go down. So you're seeing entire neighbourhoods with the value of homes that is falling, not from people necessarily selling but because of foreclosures and delinquencies going on. This has a big overall affect on the economy. When sub-prime mortgages are going down or having a lot of delinquencies and foreclosures this affects the mortgage-backed securities that these are part of. So you've seen tremendous turmoil on Wall Street where the value of these mortgage-backed securities has fallen very dramatically causing huge write-offs by the banks of the value of these mortgage backed securities. So the sub-prime mortgage crisis is big and unfortunately it's getting bigger all the time.
How does the sub-prime mortgage crisis affect the average American?
The sub-prime mortgage crisis affects the average American in several ways. First of all when the value of homes is going down because people are losing their homes to foreclosure, because their sub-prime mortgage rate goes up and they can't afford it. This means entire neighborhoods are going down in value. It's also affecting Wall Street firms who are taking enormous write-offs because of the loss of value of their sub-prime portfolios; it has also caused an enormous credit crisis. Remaining banks do in fact, not want to lend, or want to lend on much tougher criteria than before. During the heyday of the sub-prime mortgage you could get one for little or no money down with what's called stated income, which means you'd sell them on whatever you want on your income and they didn't have to have any proof of it. These are often what is known as liar loans and loads of those are out there being made, then when they blew up, banks are tightening down much more dramatically, demanding higher credit scores, and in many cases down payments of ten to twenty percent, so in the future there may not be as many sub-prime loans but the implosion of the sub-prime mortgage market is affecting the kind of credit that's available today.