Hi, we have all heard the whole “subprime loans causing havoc on wall street” thing.
What I am wondering, is why these “subprime” borrowers are defaulting. Is there something wrong about the U.S. economy, or is it just that investors don’t usually invest this heavily in that sector.
cheers
Actually, this isn’t just a U.S. thing. There was a story out last week that things in the U.K. real estate market might be even worse than in the U.S. Also, there seems to be quite a bit of exposure to this stuff in Europe.
Basically, it all comes down to lenders loosening their credit standards and lending to folks who probably shouldn’t have been borrowing that kind of money. A lot of people really strained their financial situation to buy real estate. Some of those who were investors in the property market got caught when the market rolled over. Meanwhile, some of those who bought new homes got caught by adjustments to their interest rates, and thus their monthly payments. Mortgage foreclosure rates, especially in areas like California where the property market was hottest, are running quite high.
There are mortgage backed securities in portfolios all over the world. When people can’t repay their mortgages, the value of those securities drop.
Basically, I look at it like this. Investors in mortgage securities (to include those front line lenders) got greedy. They didn’t think properly about the risk side of things. The market went against them and they’ve taken a big hit. Sounds like trading, doesn’t it?
Totally.
Thanks for a great reply. 
I’ve only just turned 18, and my study of economic history is full of rather large holes. But it seems to me like this is sort of a cyclical phenomenon. That at some point when things are going well, somebody in this business (finance and stuff), goes too far. Either in terms of risk, leverage, or both.
Have I understood correctly?
I’ve read some of Soros’ stuff on it. He is very sceptical of credit, since it is a very [I]reflexive[/I] instrument, and says people will continue to get burned on it, as long as it is available.
We silly humans do seem to have a habit of going to extremes. Now the market is extremely fearful, which is why credit has dried up. All the potential suppliers of it (lenders) are scared.
Rhody has a good point. But lets look a little more. Banks are drowning us with credit card applications. Has anyone ever read some of these things? I recently got one in the mail that had a $350 limit. I know not vary good but when I read the fine print I found out that if I was accepted for the card I would already be maxed out on the card befor I got my hands on it, and I would have to pay 18%.
Not to mention that everywhere you turn some one wants to loan me money without ever looking at my credit report. Then you have the government making it harder to file bankruptcy, instead of making banks responsable by curbing back on the credit offers or even giving some kind of finanical class or how about this. Lets lobby for finanical edcuation in SCHOOL!
Befor I go I have to tell you all my favorite new scam to suck us dry. A few months ago I was getting the mail for my mom. She had a bill for a maganize subscription. She was confused because she did not remember getting it. So I took a close look at it and found out that it was not a bill but an order form that look like a bill. By filling it out and sending it in she was agreeing a 3 year contract. This is the stuff that needs to be stopped.
Sorry I am ranting but this is a close personal issue for me.