A ';correction'; is a polite way of saying a significant drop in values. This term is often applied to the stock market also.
A ';subprime'; mortgage is one provided to borrowers with poor credit and tougher financial terms than a traditional ';prime'; mortgage. This includes a higher than market interest rate, adjustable interest rates, negative amortization (the loan amount actually increases over the life of the loan), shorter length loans (less than 15 years), etc. These loans were provided to borrowers with little or no down payment and less than perfect credit. In exchange the borrower has to pay more for the loan. The people who offered these loans were not the ones who ultimately loaned the money so they pushed them hard to earn fees for taking the loan application. They also often fudged the facts about the borrower to get the loan approved. This is the result of a mortgage marketplace where the people offering the loans have no risk if the borrower ultimately can't repay it. Fortunately, this kind of lending has totally dried up, but its also made it more difficult to get a prime loan and that has dramatically hurt the housing market.What is housing market correction and subprime mortgage?
Green Lady did a good job explaining subprime.
To expand upon correction... it applies to many sectors, not just housing. In this case, housing prices rose an average of something around 3% per year for the last 60 or so years prior to 1995. This was about even with the average increase in pay for the average American worker. So housing went up as salaries went up.
In the early 2000's, housing started to increase 20-30% per year. People were still only getting 3-5% raises each year, so housing was becoming historically over-priced. However, due to houses now being worth so much, builders popped up everywhere building condos and plans of houses, selling them for a HUGE profit. Bad loans also popped up because nobody could afford this outrageously high prices, and the bad loans allowed unqualified people to buy a house and achieve the ';american dream.'; When someone who makes minimum wage can buy a 500K house, greed/jealousy sets in and everyone goes and gets this subprime mortgages to keep up with the Jones.'
Well those homeowner dreams are now nightmares. People got in way over their heads and bought houses that their income levels would never meet up with and defaulted. Housing is currently ';correcting'; to come back to the level it always should've been at, which is a 3-5% increase in value per year. The catch is that now income is increasing even less though due to the slow economy, so housing prices ';should'; be rising less as well... making the correction last even longer.
Sub prime means below prime standard. Low quality investments. It happened when US financial institutions gave money for mortgages at an extremely high interest rate to vulnerable 'high risk' people i.e. people with very bad credit histories who could not qualify for a mortgage loan anywhere else.
They put a bunch of these type of mortgages together in a package and sold them to other financial institutions. It is estimated that 50% was purchased by European banks and a lesser percentage was purchased by Asian institutions. They sold them quite easily because they appeared to be a good source of short-term income, and they were. Long term though, it was a complete disaster.
Eventually, the 'high risk' people did become 'high risk' and defaulted on their loan repayments, soon the banks realised that they had been left with a very bad deal. They had borrowed more than they had in their coffers.
When the public realised that there was a chance of the banks losing money due to the high risk 'Sub-Prime Lending', they all marched into their bank and demanded their money. This crashed some banks and may crash more.
Market correction from Wikipedia:
http://en.wikipedia.org/wiki/Bear_market鈥?/a>
A market correction is sometimes defined as a drop of 10% to 20% over a short period of time. Because of depressed prices and valuation, market corrections (if it were possible to identify them as such) could be a good opportunity for value-strategy investors. If one buys stocks when everyone else is selling, the prices will be low and therefore the P/E ratio goes down. Thus one can purchase 'undervalued' stocks with upside potential.
No comments:
Post a Comment