Everyday whether I read the business headlines in the morning or watch Bloomberg TV at night, there is bound to be a mention on the subprime mortgage crisis in the US. Now what exactly is the subprime mortgage crisis? In short, it was started by mortgage lenders in the US who extended mortgage loans to consumers with low credit rating (subprime) as opposed to consumers with a high credit rating (prime).
Consumers whom could not qualify for a mortgage loan under the mainstream banks flocked to subprime mortgages with variable (usually on an increasing basis) interest rates. Now if the value of the property rises, the home owner could always refinance their loan to keep their loan cost low. The problem arises when the US housing market stagnated and these home owners could no longer refinance their loan. Caught with the increasing interest rates on their housing loan, they could no longer afford to repay their loan and many eventually defaulted. This in turn created a ‘domino effect’ on the world markets. A report at Wharton gives us a more detailed picture of the crisis. Now what are the real effects on landbanking…
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