Subprime Mortgage Meltdown
By Cartoon: © Patrick Chappatte of The International Herald Tribune
Project: Cynthia Kirkeby, ClassBrain, Inc
Jan 24, 2008, 08:20 PST
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| © Patrick Chappatte of The International Herald Tribune 2008 |
The Subprime Mortgage Meltdown
According to Ben Bernanke of the Federal Reserve in a press release on May 17, 2007:
Subprime mortgages are loans made to borrowers who are perceived to have high credit risk, often because they lack a strong credit history or have other characteristics that are associated with high probabilities of default. Having emerged more than two decades ago, subprime mortgage lending began to expand in earnest in the mid-1990s, the expansion spurred in large part by innovations that reduced the costs for lenders of assessing and pricing risks. In particular, technological advances facilitated credit scoring by making it easier for lenders to collect and disseminate information on the creditworthiness of prospective borrowers. In addition, lenders developed new techniques for using this information to determine underwriting standards, set interest rates, and manage their risks.
This high risk loan practice proved to be very profitable for a few years until the interest rates began to creep up and homeowners who were just barely making ends meet found themselves unable to make even slightly increasing payments. When housing prices began to flatten out, the housing market began to hit a critical phase. Now people who couldn't afford the increasing payments on their adjustable loans, also couldn't sell their homes. Often times they end up owing substantially more than the home is currently worth as the housing prices drop in their area. This set of circumstances causes a snowball effect. Homeowners default on their loans and the banks foreclose on their homes, adding more inventory to an already faltering housing market, which in turn suppresses the housing prices further, causing more loan defaults. A very nasty cascading effect that has now begun to effect the overall economy and the world markets.
Questions to Ponder
- Is there some way to stop the cascade effect triggered by the subprime mortgage crisis?
- Hillary Clinton suggested that the baks shouldn't foreclose on strapped homeowners?
- Do you think that Hillary Clinton's suggestion of a 90 moratorium?
- Congress just passed an incentive package to help spur the economy. Do you think their package will actually have any effect on home mortgages?
Learning Links for the Subprime Mortgages and the Housing Crisis
- 2007 subprime mortgage financial crisis
"The subprime mortgage financial crisis of 2007 was a sharp rise in home foreclosures which started in the United States during the fall of 2006 and became a global financial crisis within a year."
Source: Wikipedia
- EarthTalk Archives
Past issues of EarthTalk Magazine are available online in this helpful archive.
Source: EarthTalk Magazine
- Fed slashes key rate to 3.5%
The blacklash from the subprime lending fiasco has started a general economic slowdown, which has caused the Fed to lower rates dramatically in January 2008.
Source: CNN Money.com
- Democrats offer fixes to foreclosure crisis
Tougher laws sought; GOP warns on taxes
Source: The Boston Globe
© Copyright 2008 by Classbrain.com
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