Introduction Subprime is the cause of USA Economyslow down.

It is the very popular news among everyone and it is become very serious then expected. It caused more damage to all the industries especially Banking, Insurance and Automobile sectors. Subprime crisis caused big loss to the banks and now it is affecting the other industries like Auto Mobile companies (GM, Ford, etc.).

Sub-prime Crisis Introduction In the US, borrowers are rated either as prime (indicating that they have a good creditrating based on their track record) or as sub-prime (meaning that their track record inrepaying loans has been below par). Loans given to sub-prime borrowers, something banks would normally be reluctant to do are categorized as sub-prime loans. Typically, itis the poor and the young who form the bulk of sub-prime borrowers.In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even p e o p l e w i t h d o d g y c re d i t b a c k g ro u n d s t o re p a y o n t he l o a n s t he y w e r e t a k i n g t o b u y houses. The government also encouraged lenders to lend to sub-prime borrowers arguingthat the young and poor will be able to buy houses.With stock markets booming and the system flush with liquidity, many big fund investorslike hedge funds and mutual funds saw sub-prime loan portfolios as attractive investmentopportunities. Hence, they bought such portfolios from the original lenders. This in turnmeant the lenders had fresh funds to lend. The subprime loan market thus became a fastgrowing segment.Since the risk of default on such loans was higher, the interest rate charged on sub-primeloans was typically about 2% points higher than that of prime loans. This of course onlyadded to the risk of sub-prime borrowers defaulting. The repayment capacity of subprime borrowers was in any case doubtful. Also the higher interest rates meant higher EMIs than that of prime loans, further raising the risk of default. Further, lenders devisednew instruments to reach out to more sub-prime borrowers. Being flush with funds theywere willing to compromise on prudential norms. In one of the instruments devised theyasked the borrowers to repay only the interest

This increased the default rate among sub-prime borrowers. Since in home loans in the US. To further reduce the risks and to get more loans (earn more money by loan interest). Simply says. they still can sell the houses with higher value due to the property appreciation. This coincided with a slowdown in theUS economy and the matter became worse. many of whom wereno longer able to or willing to pay through their nose to buy a house that was declining invalue. we need to understand what subprime means. They¶re disqualified because they have higher risks that they are not able to make the loan payment due to their poor credit history. the banks repackage all mortgages into an investment product and sell it to financial . why they want to do that? Yes.this increased the supply of houses for sale while lowering the demand. you got it. The main reason why the banks want to do this is they predict the value of the property will be going up. ³Subprime´ is an adjective relating to or for people with apoor credit rating. The declining value of the collateralmeans that lenders are left with less than the value of their loans and hence have to book losses. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices startedfalling. What is Subprime Mortgage? First of all. But still. The banks are also greedy and they want to earn more. Cause of the crisis The housing boom in the US started petering out in 2007. They earn more with the higher mortgageinterest rate and just in case the borrowers can¶t continue the payment. if you never clear your credit card balance monthly.portion to begin with and the repayment of the principal portion was to start after 2 years. By dictionary. This loan or mortgage is called ³Subprime Mortgage´ or ³Subprime Loan´. Estimates are that the US housing pricesdropped by almost 50% from their peak in 2006. So they increase the mortgageinterest rate (higher than the conventional loan) and they call it a subprime mortgage. They come out a special type of loan to these poor credit rating people. It is all related to money. A poor credit ratingpeople are disqualified to apply for conventional mortgage or loan application. thereby lowering prices even further and setting off a vicious cycle. Bank is very clever. Why Banks Want Subprime Mortgage? Why banks (subprime lenders) want to lend money to those who havebad credit history? They may not even able to payback the bank. the collateral is typically the home being bought. you have a poor credit rating.

they are stuck having to pay a much larger mortgage payment. Until one day. banks have a very big problem also because they rely on this these financial institutions to invest in the pool of mortgages investment product. It is that simple.S). Not only they¶re not able to pay their existing debt. the cheese is gone. the real estate market begin to cool down and house prices begin to fall. Everybody wins now becomes everybody loses! When demand is more than supply (everyone wants to buy house). On the other hand. What happen to subprime borrowers? They buy the house only for one reason which is expecting value of the houses to go up and they earn from the property appreciation.This causes many of these borrowers to not be able to make their house payment. less people could afford to buy a house. All the debts they had previously can be easily paid off. Can you see that? Everybody wins! Borrowers. When the house prices begin to fall. the effect is opposite and this even makes the conditions worst. Sadly. the subprime borrowers are going to suffer. This is now not only between banks and borrowers get involved in this subprime mortgage but also all the financial institutions around the world. So for the financial institutions. As a result. if the cheese is gone. When the house or property values drops. They can rent out their house with higher value or they can sell the house with higher value. yummy! When and Why Crisis Happens? I think you should be able to guess it by now when the crisis will happen. As there were not as many buyers. banks and financial institutions are eating the same cheese happily and the cheese is ³property appreciation´. they believe that the property value will go up. when it becomes much more expensive to borrow. If no wants want to buy them. The borrowers also refinance their loan at more favourable terms due to they no longer have a bad credit rating history. they are going to lose their money that they invested because the borrower are not able to pay the loan payment. Because house prices had increased so rapidly in the past few years. Yummy. where the banks get the money to offer the loans? They bank also suffer from the lost for those borrowers who failed to make payment. Financial institutions no longer wants to invest and do not trust the bank anymore. the property values went up like crazy. Crisis happens! Everyone suffers! . what happen? Crisis happens. More and more borrowers failed to pay their monthly loan payment due to the interest rate increases. the banks increase the mortgageinterest rate to cover loses and hopes that borrowers (who afford to pay) can pay more. Everybody enjoys the same cheese.institutions in all over the world (not just in U. paying back the loan payment is not a problem at all. You may ask why they want to invest in this high risk product (pool of subprime mortgage)? One reason.

i. no down payment on the home financed. The Cause of the 2008 Financial Crisis As someone who spent the majority of his life as an international bank analyst and executive. What it next? It is really unknown. Most of the sub-prime loans have been made to borrowers with poor credit ratings. These loans increased dramatically as a 9/30/99 New York Times article explained. ³In a move that could help increase homeownership rates among minorities and low income . Anyway.e. A huge portion of the increased mortgage loan defaults are what are referred to as µsubprime¶ loans. from 0.S since 2000? Will this affect other countries? This is another huge topic to be discussed. Future is getting harder and harder to be predicted for the coming years. Will it causes another economy recession in U. defaults were less than one-third of that. The facts are that approximately 6% of all mortgage loans in United States are in default. Historically. I learned.. The economy now is no longer as simple as in 30 years ago where we can predict the future with certain of accuracy. that to fix a problem. one needs to understand what caused it. It can be difficult to see because sometimes it takes time for the effects of bad decisions to manifest themselves. Close to 25% of sub-prime and Alt-A¶s loans are in default. I hope this post is making sense and give you a little bit general idea on this subprime mortgage crisis in U.S. Therefore the impact of this crisis is still has a lot of uncertainty. It also requires that we examine the facts rather than our emotional biases. and/or no verification of income or assets (Alt-A¶s).Conclusion Subprime crisis happens because everyone predicts the property value will appreciate over time.25% to 2%.

Many home owners got home equity loans to pay their first mortgages and credit card debt. Now. government. is easing the credit requirements on loans that it will purchase from banks and other lenders. During the past eight years. Unfortunately home prices peaked in the winter of 2005-06 and the house of cards started to crumble. That is what this bailout is all about.S. the loans were re-sold primarily to investment banks which in turn bundled most of them. As long as the Federal Reserve (another government created agency) kept interest rates artificially low. Also the Clinton Justice Department threatened banks with lawsuits and fines ($10. President Clinton also reduced Fannie Mae¶s reserve requirement to 2. monthly mortgage payments were low and housing prices went up. Also ACORN (Obama¶s community service organization) was instrumental in providing borrowers and pressuring the banks to make these loans.consumers. The politicians in Congress (mostly Democrats) do not want you to know they caused the mess. People could no longer increase their mortgage debt to pay previous debts. Since the mortgages purchased and guaranteed by FM&FM are backed by the U. James Johnson and Franklin Raines (most recently Barack Obama .50 in mortgages for every $2.5%. It is not the government paying the banks for the bad loans. it is us!! Principally Senate Democrats demanded that Fannie Mae & Freddie Mac (FM&FM) buy more of these risky loans to help the poor.000 per application) for redlining (discrimination) if they did not make these loans. the Bush administration made 17 attempts to reform FM&FM. we taxpayers are being told we have to bail out the banks and everyone in the world who bought these highly risky loans.´ Why would banks make such risky loans? The answer is that the Clinton administration pressured the banks to help poor people become homeowners. having been made aware by whistleblowers that the books had been cooked by Clinton appointees. the taxpayers (us) have to pay for them. If more than 2. the Fannie Mae Corp. That means it could purchase and/or guarantee $97. taking a hefty fee. a noble liberal idea. To allow Fannie Mae to make more loans.5% of the loans go bad.50 it had in equity to cover possible bad debts. and sold the mortgages to investors all over the world as virtually risk free.

In 2005. The new head of the $700 million bailout is also from Goldman Sachs. virtually all the investment banks that are in trouble and being bailed out are run by financial supporters of Obama and other Democrats. And there is plenty of blame to go around in this financial crisis. FM&FC have been virtually private piggy banks of campaign contributions for Democrats for the past 10 years. responsible with overseeing FM&FM. By 2006 there was enough evidence of malfeasance that Raines was forced out. but the reason it happened was 100% caused by a Democrat run government that forced a liberal policy initiated by President Clinton and reforms primarily blocked by Democrats. It was announced that our government will infuse capital into the troubled banks. Recently the court ordered him to pay back $40 million in fines. Democrats blocked it in Committee from getting to the Senate floor for a vote. Not surprisingly. John McCain submitted a Fannie Mae reform bill. There are plenty of videos on the Internet showing many Democrats including Senate Banking Committee Chairman Democrat Christopher Dodd and House Banking Committee Chairman Barney Frank. He had paid himself over $90 million. This gives whoever is in power of our government the ability to force the same kind of abuses that have caused this massive banking crisis in the first place. a token amount went to some Republicans. . bonuses and stock options that he gave himself based on false financial statements of Fannie Mae profits. Barack Obama has received more campaign donations that any other politician in the past three years from Fannie Mae and Wall Street. Yes. One would never know this by watching the news or reading newspapers. This is like letting the fox be in charge of hen house security. Secretary of the Treasury Paulsen was head of Goldman Sachs. In the 2006 elections.financial advisors) who gave large bonuses to themselves and other Clinton appointees by falsely showing huge profits. the Democrats took control of the House and Senate. assuring us that there were no problems with FM&FM right up to their collapse.

S. to lower the standard of living of those of us who are financially prudent and give our earnings to those who are not prudent. We do not need to have another depression. The big excuse for the bailout is that credit markets have frozen up. is adopting failed liberal socialist policies. But it is not true.Until the majority of our citizens understand whom (government liberals) and what (liberalism/socialism) caused this mess. The only way this can be rectified is to allow the people who made the mistakes to take their losses. but the government is taking the steps to make it happen. Our government is following in the footsteps of Hoover and Roosevelt. . There is plenty of credit available for good credit risks. Already we see that the bailout has had virtually no effect on the markets other than to cause huge sell offs because smart investors see that the U. It is called taking personal responsibility for one¶s actions. through massive inflation. The taxpayer financed bailout should be reversed immediately as it will only encourage more irresponsible fraudulent behavior. we will allow our elected officials.

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