What are the Reasons for sub prime crisis?

Answer 1

The main reason is too much debt. In other words, the typical US consumer is now awash in debt brought about by the profilgate use of credit cards, coupled by the purchase of homes with little or no down payment, and barely enough income to support monthly payments. Overly aggressive lending practices poured millions of dollars into the home mortgage business, and these dollars were offered to these marginal home buyers at extremely low initial interest rates. These low rates were come-ons, since the rates could and did escalate as the low initial offering rate period expired and the revised interest rates, in some cases, rose by 30-50%. These higher mortgage interest rates dramatically increased monthly payments, and over extended home purchasers simply did not have the income required to be able to make these increased payments.

Answer 2

The Subprime Crisis is an economic problem that happened in the United States. It cannot be explained in a paragraph or so. In short, it happened due to uncontrolled lending in the US Financial Markets.

Some of the reasons for this crisis are:

1. The US real estate market crash

2. High default rates on Subprime loans &

3. Subprime Mortgage backed securities

Answer 3

Someone came up with the concept of the "Adjustable Rate Mortgage." It was a way that poor people could buy a fairly large house. Their monthly payment would only pay the principle, insurance, and taxes for a few years. If they paid interest, it was at an extremely low rate. After a few years, the rate of interest greatly increased and the monthly payments went up by several hundred dollars. Newspapers, magazines, and liberal politicians praised it. Mortgage salesmen lied on mortgage application forms and no one checked on them. After the salesmen filled out the forms, the customers signed them. They did not understand all that mumbo jumbo. They trusted the salesmen. The salesmen gave the mortgages to the mortgage companies and collected their commissions. The mortgage companies combined the mortgages into large bundles. They had them given an AAA rating. The rating agencies decided that since there were so many, they must be good. They did not realize that a pile of garbage is still garbage. The mortgage companies sold the mortgages to companies like Lehman Brothers, Merrill Lynch and others. When the rates on the adjustable rate mortgages went up, the poor people did not have the money to make the increased monthly payments. The boom in house construction ended with many houses standing empty. Workers were laid off. They could not pay their bills. More houses were foreclosed. Where the boom had been the greatest, California, Nevada, and Florida, the collapse was the biggest. The financial crisis in housing caused one in lending in the financial markets in New York. Suddenly the lenders faced a crisis. Their money vanished. They had layoffs. New York was not immune to the problems of the rest of the nation.

Answer 4

It's not a "subprime mortgage crisis." It's a "derivatives abuse" crisis. The world's exposure to Credit Default Swaps is currently larger than the world's Gross Domestic Product. Much of it is "naked"--not insuring a derivative held by the CDS owner. Any naked CDS is a gambling instrument equivalent, in my view, to a lottery ticket...except that if you play the lottery and lose, the government doesn't give you your money back. The other derivative of concern is the Collateralized Debt Obligation, which is based on derivatives they couldn't move any other way. Check it out: I can loan you $100,000 to buy a house, then securitize that into a mortgage-backed security, securitize the MBS into a CDO then securitize the CDO into ANOTHER CDO! If you lose your job and your mortgage goes into default, four financial instruments break: the mortgage, the MBS and two CDOs. Plus at least three CDS. Incidentally, MBS aren't just for subprime debt--Fannie Mae, who deals mainly in prime paper under $240,000, sells them too. If your loan is above $240,000 like most McMansion mortgages are, it will be securitized in the private placement market because Fannie Mae doesn't want it. The sooner we get it into our collective thick heads that Structured Finance will kill the world financial markets if it's not reined in, the better off we will be.

Answer 5

The Subprime Crisis is an economic problem that happened in the United States. It cannot be explained in a paragraph or so. In short, it happened due to uncontrolled lending in the US Financial Markets.

Some of the reasons for this crisis are:

1. The US Real estate market crash

2. High default rates on Subprime loans &

3. Subprime Mortgage backed securities

Answer 6

The Subprime Crisis is an economic problem that happened in the United States. It cannot be explained in a paragraph or so. In short, it happened due to uncontrolled lending in the US Financial Markets.

Some of the reasons for this crisis are:

1. The US Real estate market crash

2. High default rates on Subprime loans &

3. Subprime Mortgage backed securities