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Read the following article carefully before participating in the discussion:
http://news.bbc.co.uk/2/hi/business/7073131.stm
Then read the blog carefully and answer the most recent question. Respond to and expand on your classmates' answers where appropriate. Ask each other questions about any points that are unclear.
To contribute, add a Comment to this post (click on Comments link at bottom).
This discussion is open from Friday, 7th Mar to Friday, 21st March. I will also participate and provide feedback to help you improve your understanding of this issue.
Happy writing!
Read the following article carefully before participating in the discussion:
http://news.bbc.co.uk/2/hi/business/7073131.stm
Then read the blog carefully and answer the most recent question. Respond to and expand on your classmates' answers where appropriate. Ask each other questions about any points that are unclear.
To contribute, add a Comment to this post (click on Comments link at bottom).
This discussion is open from Friday, 7th Mar to Friday, 21st March. I will also participate and provide feedback to help you improve your understanding of this issue.
Happy writing!
87 comments:
Based on our class work and the BBC article, what do you understand at this point about hte subprime lending model?
In old mortgage model, there is an arrangement between banks and their customers to borrow money to buy a house.
However, this system has limited customers. That is why they develop a new system called: subprime lending model.
In this system; bank sells mortgage bond, bank grants mortgage, homebuyer pays bank and bank pays bondholders.
It is for customers whose poor credit status. Mortgage is risky for them that is why interest rates are high.
The subprime lending model is for people who are bad history and have poor credit status. Banks gave this credit to lots of people, because they took the money from mortgage bonds, and they could raise the interest rate after 2 years, so they had a huge profit from this fact. But they continued to give the credit to everyone, and then the interest rates increased. Homebuyers could not pay back their loan to banks, and so the banks could not pay back the money to the bonds. Thus both homebuyers and banks failed, homebuyers were foreclosed by the banks and the banks went to bankrupt. There was a crisis, and this model of subprime lending caused a recession. Every one suffered from it.
Sub-prime lending is that banks give mortgage people who have poor credit history."House prices were high and it was difficult to become an owner-occupier without moving to the very edge of the metropolitan area"(BBC News). People want to buy house but financial situations are poor.Sub-prime lending is new model of mortgage for these people.These types of loans are risky because interest rates could increase suddenly. Also,if they can't pay their loans,banks will foreclose their houses.And people could ruin their credit histories.Subprime lending is dangerous for banks too.Because if a lot of people who receive mortgages with poor credit history default,the banks will crash.
Subprime is a specific lending market sector. For instance; loans and mortgages are product of subprime. Subprime lending provides loans and mortgages people who have poor credit history. However, it is risky for both banks and individuals. If individuals cannot pay money, they can lose their house. They can ruin their credit, the central interest rates can suddenly increase. Banks cannot recover the loan so they might go bankrupt so mortgages bondholders have worthless investment. On the other hand, the banks earn commussions from selling mortgage to the bond market, pay less in long. Individuals can have own house, They can buy a house with a small deposit, save their money,
In the classical method, banks give mortgages to prime borrowers after this these people pay back to bank.
But in the subprime model, firstly bank sell the mortgage bond in the bond market after this bank give the mortgages to subprime borrowers and homebuyer pays bank and bank pays bondholders
Banks do this because subprime borrewers are risky
Subprime lending is a new model of mortgage lending. Banks sell mortgage bond from the bond market and grant mortgage. Homebuyer who has a poor credit status pays bank in long time period. Sub-prime lending model include some risks for homebuyers and banks. If subprime borrowers cannot pay the loan back, the bank can foreclouse on his/her home. The central interest rate could increase suddenly. They could ruin their credit. If subprime borrowers cannot pay the loan back, the bank cannot bring back the loan and they might go bankrupt.
The subprime lending model is for people who have credit problems or low incomes and don't pay the money on time. Bank sells mortgage bond to the bond market and bank have cash then bank grants mortgage. Subprime borrewers buy a house or flat this money then homebuyer repay the money. This model will be risky for both bank and individuals. İnterest rates could rise suddenly so if people can not pay the moneY and they default on their loan , the bank forecloses on their house and if people default on their mortgages, banks could go bankrupt.
This model differs from traditional model. In this concept, mortgage bond market is also included. Homebuyer pays to the bank and bank pays to bondholders. This model is used for people who have bad credit history. Subprime lending model is risky for banks because, people may default on loans ad it is also risky for borrowers because of the increment of interest rates. Last thing that I know about this model is that subprime lending model is the main reason of the recession in US today.
Sub-prime lending which is given people who have poor history and low income to repay their loans to own a house, is different from the traditional model. In this model firstly, the bank sells mortgage bond in the market, than grants its mortgage, by this means it give loans to sub-primes with a strong assurance which mean it could take control the interest rates( as seen ARM), after that the sub-primes repay their loans to the bank and the bank pay mortgage bonds to the market. This model's condition is taken control more than traditional with the interest rates, because the bank could raise the interest when it bonds decrease in the market, so the sub-primes couldn’t repay the interests. After that they would lose their house by a foreclosure. This also means that the bank would have a bank crash and there would be most negative conditions for the countries’ economy. The crisis begins gradually with a big problem!
Excellent explanations so far, everyone - now I want to ask you a new question:
Who do you think is to blame for the credit crisis?
I think the banks giving the credit to people is to blame for the crisis. Because it is dependent on the banks to give credit every people who have poor credit status. And the banks should be to blame, because they want to have profit more and more, so they increased interest rates continuously. Thus people defaulted, the banks went to bankrupt, and the crisis became.
This model gives people who have poor credit. Banks buy mortgage bonds and then grant mortgage. This model has risky because people have bad credit status so they cannot pay. And if people default, banks can bankgrapt. But I didn't understand why banks have risky.
Ayşegül, do you mean why is it risky for banks to grant subprime loans? Remember that subprime borrowers usually have a poor credit history, so it's possible that banks will not be able to recover the full amount of the mortgage plus interest if the homeowner defaults.
I think nobody is blame for the credit crisis which is occurred between the bank and the sub-prime because the sub-prime inherently need a house to own and barely they own it with a loan and barely they can borrow it from a bank. This is their natural right. There is no wrong in this subject. On the other hand; the bank is right too to use money for giving it to the citizen and retake it from them in an interest rate. This is also it natural right. But the only problem is that to keep the rates on the bank not on the government because the bank could increase the rates after 2 years later. But it retake it in many years so sub-prime lending model need an arrangement about taking control of the interest rates.
I read most of them.There aren't any unclear points.And I agree with Ferhat.Nobody is not blame for credit crunch.Banks give mortgages to people who have bad credit history.If a lot of them cannot pay loans,banks will crash.This causes crisis.I admit this.But these people want to have their own houses.Subprime lending provide this.Having their own homes is right for these people.
I don't agree with Melike and Ferhat. I think every body doesn't have to have a house. So banks shouldn't grant people who have bad credit status. If people default, banks can crash and this result can cause that economic crisis begin and economic of countries are affect from this condition.
In my opinion, it is not suitable to blame only banks for credit crisis. Borrowers are also to blame for this crisis. Everybody should accomodate themselves circumstances. If I think that I may default to pay my loan, I won't get credit. I do not take any risk. This may cause serious problems which affect my whole life. Apart from that, banks are also to blame for crisis. In creasing rates is not justice and it is a cruel act for borrower.
But every one wants to own their house. Subprime lending model makes people have their house, also they explain their interest rates. Yes, they say that they can increase the interest rate, this model is risky, but people cannot know the banks continuously increase the interest rates. There are so many differences between the first interest rate and the last interest rate people pay. So I think people should not be to blame.
I think that, If there is a blame ossensibly, reason of this blame is both banks and borrowers.
Everybody want to has house but people who have poor credit history must trust themselves about pay back. Otherwise, when they lose their house, banks is not blame. On the other hand, I thinkbank should not give mortgage or loan everybody. Because If borrowers cannot pay money, banks wiil be able to go bankrupt.
I think borrowers and banks are both to blame for this crisis. Borrowers should aware that interest rate may increase. Also borrowers should depend on themselves to pay back the loan when the interest rate increase. If they do not, they should not get credit because it can be very risky. On the other hand, banks should not give credit to everybody. It can be also risky for banks. Nowadays lots of banks are face to face to bankrupt because of this crisis.
I think both borrowers and banks are wrong. If you have a poor credit status, you must know that you cannot pay money back to banks. That is easy to think! Banks should not give credit also to this people. Subprime mortgage will have to be cancelled. Everyone must not get a house. It is invalid.
I found your comments about who is to blame quite interesting. I don't think we can say that no one is to blame; Ferhat, you might like to read some more detailed newspaper articles on the Internet. However, I also don't believe both parties are equally to blame. Banks and other investors have more responsibility to understand the financial system. This seems to be a clear case of greed getting in the way of judgement. You can read some excellent articles about this in the New York Times.
But my next question is this:
What has been happening recently in the United States? There have been some very interesting headlines...
Traditional mortgage system bases on a direct relation that banks give mortgage to people who want to have a house and these people pay mortgage credit in a long-term period. However, banks expect borrowers have high credit score and high income. In that point, a new mortgage model is named sub-prime mortgage appear for people who do not have good credit history. In sub-prime model, bank sells mortgage bonds in bond market, borrower pays bank and then bank pays investors who buy mortgage bonds and of course, bank charges a higher interest rate for sub-prime model because of risky borrowers. This model has come into excess demand by many people who have low income but want to have their own house
but subsequently American economy has faced a mortgage crisis and this crisis has spread to all of the world rapidly. I think its reason can be investors who want to make high profit from upturn in mortgage market. They have had high profit by buying and selling houses with mortgage and also speculate in real-estate market. As a result of this, a mortgage crisis has broken out all over the world.
So what's the current situation in the United States? (check Internet headlines)
In these days there's a big loss about an insurer:
(we can see bad effects of new mortgage system on this news)
MGIC(US mortgage insurer) loses $1.47bn (£750m) because of the housing slump and resulting high levels of credit crunch.
(BBC News)
In the USA all personal debt is subject to an individual’s credit rating. If your credit history is good and your income is enough, you can take a loan from a bank to buy house. With a prime mortgage you pay for the house in monthly instalments, which means it is like paying rent. But if you have a bad credit history and have not enough money to buy house, you can take a loan from a bank with an increasing interest rate. It is sub prime mortgage. It is new model in the market. Sub prime model has a homebuyer, a bank, and a mortgage bond market. Why do banks need the bond markets? Because the bond markets have covered to enough money as cash for sub prime borrowers. The bank sells credit from mortgage bond market and it gives to homebuyer. After that, homebuyer must pay monthly instalments to the bank and the bank pays bondholders. If homebuyer repayments stop, their loan is annulled. The new model is so risky than traditional model since interest rates can increase as dramatically. Hence, banks can go bankrupt when homebuyer repayments stop. Briefly, sub prime lending model is that.
Nowadays, central banks in the world face a trouble in terms of having cash money. In addition, euro has record level against American dollar.
The US has seen an economic slowdown across all regions since January, a US Federal Reserve report says(BBC News). In America, there is recession fearing, but Bush blamed that it is not. Recently housing and credit markets hit the economy hard (BBC News).
Actually, if you search a little more carefully, you'll find that last week all the major financial institutions finally had to admit that the United States is now in a recession. Has anyone watched World Business Report on BBC? Channel 122, every night at 19.30.
Merve Ç., you submitted a very well-written explanation of the crisis with good use of academic vocabulary.
Your comments are all interesting and show awareness of the situation, please keep adding more and/or asking questions.
Nowadays, there is a big crise on the subprime lending model. There is another cris about American economy and this affects the people who uses mortgage. The can not pay thier paymnets and they evict their house.Now the banks have many house which they willl not sell easly.
Also subprime lending model is so risky. Like that position, when there is a cris stuation, people casn not pay for the houses and the bank can not make a money. The people have to leave their house and there are another crisis like industry crisis,mortgage crisis...
I think there are many people which causes credit crisis. Firstly economist.They must work on that issue and they can avoid that crisis or solve that crisis more easly. Secondly, the custumora is guilty. They know themselves and they should critisize themselves about credit. Can ı effort that or not? And thirthly the bank is guilty of that.They should think more carefully.İs it risky to give a credit to these people which has low credit history? And if there are low crdit history the should not give them. I think.
I really agree with Ayşegül. Every body does not have to have a house.Some of them should pay a rent for their house.I alos understand them.Everybody wants to have a house but on the earth some people have house and some people does not house.This is a rule of earth.
In the united states there are crisis on many stuation.Economic crisis,oil crisis,mortgage crisis,dollar crisis...I think this crisis came because of the bad administratiion.If they study on economy more,they do not pay for ridiculus thig like a war,there probably is not a crisis like that.In the us now everything goes bad position for people. I hope new administaration will be better for america.
Bush said,"the growth package would have to be big enough to make a difference to the "large and dynamic" US economy. Mr Bush said it had to include tax incentives for US business and direct tax relief for the American people."("Bush calls for economy kick-start"BBC News).
Bush thinks that to create jobs and to keep strong their economy
their administration should work together.
"The president said he expected the economy to continue to grow, but at a slower rate than in previous years."("Bush calls for economy kick-start"BBC News).
Yes, Şeyda, although defense spending did not cause this crisis, I agree with you that it is certainly doing nothing to strengthen the US economy. We now spend about $600 billion on the military every year. This is money that developing nations can only dream of. In the meantime, people are struggling with mortgages! Certainly the lives of ordinary people is not something the Bush Administration concerns itself much with.
Why do we talk about just for US? This crisis also has global consequences such as redundancies of banks and other corporates. Let's talk about the reflections of the crisis to European economy.
Title of news is New US rules for credit markets.
News mention about the new suggestions in order to avert to recur credit crunch and bad mortgages debt blows and financial chiefs aim at recovery of confidence again.(BBC News)
Dollar become into value because of the recession in the US economy. Central Bank decreased the interest rates to pep up the economy.
Yes, Hakan, we should talk about Europe as well - and why stop there? How about Asian markets?
Why don't you lead off this discussion?
Everybody knows that the American economy has been sick, recently. Some important reasons can cause alternation in the world. For example, Second World War had been influential about economic growth and between Marxism and Capitalism. The American economy was also influenced from the war. However, after the Second World War, the American economy returned to normal. Now, the American economy has current account deficit for approximately 700 billion dollar. Because of this, all markets think that the American economy cannot endure to the economic alternation. According to me, if this country’s economy goes to bad, other countries will be influenced from the alternation, certainly. The American dollar has been losing value. Although, with this way the American’s current account deficit is being looked forward to decreasing. The American economy has got power while their dollar is losing value. Why has the American economy got power while their dollar is losing value? Since Americans gave up consuming products which belong to Europe and Asia. They are consuming their products anymore. Because of the situation, the US can reduce foreign trade deficit, current account deficit, and budget deficit. As I said, the American dollar lost value but the American economy got power. On the other hand, we can talk impact of the economic crisis in the European economy as Hakan Gürsan said that. Euro is getting value but the European countries are losing power. According to me, future of Dollar and Euro is up to view of the UK and the US about their future. America is imputing the financial straits to Europe. For me, Euro is in difficulty, anymore.
Fist of all sonja im very sorry for contributing very late,im going to answer your question first..
When we look at the BBC news link given, we see two mortgage models. In first mortgage model there is bank and home buyer. Bank gives the credit to buyer and buyer pays the bank. But In the scond mortgage model besides bank and buyer there is mortgage bond market. In this second model the banks are supposed to pay money to mortgage bond markets which is coming from buyers. If buyers can not pay the money to banks banks cannot pay to mortgage bond markets so there would be a crysis which US is facing now.
I dont know who to blame for this crysis. When the mortgage payments increased dramatically people counldn't pay their money back to banks. For but there were several solutions which were explained by George Bush such as freezing the mortgage payments for 5 years which will stabilize the prices. But if we want blame somebody we have to blame the system. This is nobodys failture for me.
In the economy, tension is high. Today, gold market was closed the highest price. The markets are upset.
Especially stock markets are influenced from crisis. Asian stock markets decrease about 5 percent including some of the big economies, Japan as 3.71, Hong Kong as 5.18, China as 3.60. There are also decreases on Europe's stock markets about 3 percent. Bank of England (BOE) are going to give 5 billion sterling 3 days timed to the market to decrease overnight interest rate. (NTVMSNBC)
Today, tension decreased in the economy. Yesterday, stock exchange lost 2, 4%. Istanbul Stock Exchange (IMKB) lost 22 billion dollar, yesterday and a kilo of gold passed over 40 000. But, today the markets breathed freely. Stock exchange increased and foreign exchange decreased. In addition, Stock exchange passed over 40 000, finally. Dollar and Euro moved backward. Impact of the Wall Street was influential in Asia as positive.
Wow, Merve, that's really a shocking loss for Turkey! Are Turkish people worried?
As an answer to first question, i can say that subprime lending model is for people who don't have enough good credit histories for prime lending. In the system bank sells mortgage bonds to the market and gives the mortgage to the buyer, when the buyer gives his money back with interest, the bank also pays to the bondholders. There are many different kinds of subprime mortgages, including:
*interest-only mortgages, which allow borrowers to pay only interest for a period of time (typically 5–10 years);
*"pick a payment" loans, for which borrowers choose their monthly payment (full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan);
*and initial fixed rate mortgages that quickly convert to variable rates.
It's risky for the banks, because it's for the people with poor credit status, so it's not guaranteed that people will be able to pay the money back with the high interest. And it's also risky for the homebuyers because they have to pay back much more than they borrow. They might not put it together, so they will both lose their houses and be responsible for the banking failure.
Source:wikipedia
It seems discuss changed its direction but I want to say something about who is guilty. At first, the banks just wanted to get back money as much as possible by increasing interest rates bi yearly. However, while rates have been increasing, numbers of people who cannot pay back also have increased. Even if the banks foreclosure their houses, there are no enough people to be able to buy a house and that caused a slowdown (even recession) now and both sides are affected negatively. I think, the reason of this slowdown is the banks because the banks didn't explain well what ARM (Adjustable Rate Mortgages) means. As we talked in the lesson, borrowers might think the interest rates wouldn't increase. Therefore, I think the bankers have decoyed them. However, the bankers didn't know how increasing interest rates cause huge problems in the global market so they damaged themselves too without noticing and people who have bad credit status can't be accused of slowdown. Everybody wants to have a house instead of renting.
When we think about someone to blame for this crisis, both sides are. Because banks are not guaranteed to be payed back, so what they do is a speculative enterprise. They already know that they lend to people who may not get clear of debt. People are also responsible for the crisis, they should examine their income and they shouldn't take the mortgage before they are sure about they will pay it back. And they shouldn't chance the risk becuse of the high interest rates that they are required to pay back.So this is a both sided responsibility and the crisis is not something unexpected.
Banking system is actually known as the most trustful sector all over the world. Today we are talking about crisis caused by mortgage loans, a tremendous banking crisis. The biggest problem the crisis is not only on mortgage loans, it badly affects global economic parameters, too. The thing is, global economics is like a chain and, when any single parameter goes bad, everything turns upside down.
In traditional mortgage lending, people directly goes the bank, requests loan for buying houses and then bank gives money to people from their own funds and people pays back the money to bank. Though in subprime mortgage lending, primary source is again the bank, but the difference there is the existence of “mortgage bond market”. Like in traditional model, people requests mortgage loan from bank, but the difference starts after this process. First, bank sells mortgage bond in mortgage bond market, then bank grants mortgage. After that, homebuyer pays the loan back to bank, and finally bank pays to bondholders.
The mortgage market is constructed upon these base, but thing did not go well. For traditional model lenders, banks suffered because back payments stopped. In subprime lending things mixed more. Repayments to bank stopped, as like in traditional model. Then, bond payments stop because of cash problem in banks. After that mortgage bon defaulted and finally mortgage dried up – defaulted. Banks used subprime lending model for the people who has a bad credit history and traditional model for the people who has good credit status. The reason why banks sell mortgage bonds in mortgage bond market is because they are giving this money to subprime borrowers and it has a high risk rate.
After this definition of mortgage lending, we will answer the question that “Who do you think to blame for the credit crisis?”
I think banks and US government are the ones to blame. This crisis occurred because of the stop of repayments. Why did repayments stop? Because banks given these loans to people who has poor credit status and who cannot afford repayments subsequently. People with low income, loaned more than they can afford so as a reason they have defaulted. The second thing is the illogical price increases of houses. Companies made house prices higher than it have to be, actually they are cooperated with banks, and they have given more money to people. For example, if a house costs $200000, by this increasing wave, it became $350000. This also made people to have problems with paying back the money. In addition, I think companies performing in mortgage bond market also took a lot of risk, even more than they can do. They bought more than they fund, so when repayments stopped, they had a credit crunch, too. Also borrowers did not informed about mortgage system before borrowing mortgage and they took loans which they cannot afford. The other sight to blame is US government. I think the Bush administration could stop banks wrong and risky movements like lending huge money for people with poor credit status with some new laws. In addition, government could inform their citizens about how mortgage funds are risky. Actually borrowers also has fault but I think banks manipulated their desires towards having a new house. By the way, it is human nature although, and it is hard to choose the correct way sometimes.
New York University Stern School Of Business Professor Nouriel Roubini commented that US economy is in recession now and the process of getting out from this status will take minimum one year.
In addition, today, petrol became $111.80 and gold became $1030.80 in global markets.
According to CNBC, one of the most effected corporations from subprime lending crisis, Citigroup, to dismiss 30000 people. In addition, one of the most effected corporations from subprime lending crisis, Bear Stearns is sold to JP Morgan for $236 million. The actual rate of Bear Stearns before subprime lending crisis was estimated as $3.5 billion.
Today, FED(US Federal Reserve), decreased interest rate again. The decrease rate in interest is %0.75. This movement had been done to make the climate on markets.
Finally George W. Bush said he supports the movement of Ben Bernanke, the head of FED, and he trusts him. In addition, he said US economics has the power to push towards this crisis.
http://investor.shareholder.com/jpmorganchase/press/releasedetail.cfm?ReleaseID=299805&ReleaseType=Current
It is known that there are two types mortgage lending in order to make people the owner of house. In the traditional model, there is a relationship between only home buyer and the bank. For banks, this is not very profitable according to other model, sub-prime lending. If we clearly examine the sub-prime lending model, we can see the changing of interest rate because when somebody decide to buy a house in the sub-prime model, there is a teaser rate which seems more attractive for people. This interest rate is fixed in the only first two years of mortgage. After first two years, your teaser rate can be not only higher but also dependent on the level of Fed interest rates. These mortgages had a much higher rate of repossession then conventional mortgage because they were adjustable rate mortgages (ARMs) (BBC). Banks which use sub-prime model earn more money but on the other hand, people who prefer this model can face huge risky and they can be evicted from their homes.
Some headlines about the global crisis:
Fed cut interest rate from 3 to 2,25 in order to refresh the markest.
UBS, one of the biggest financial firms, dismissed 8000 people (10% of total staffs) because of the US mortgage crisis.
Northern Rock dismissed 2000 people in order to pay its debt which was given by UK government. Bank also want to reduce its mortgage lending 50%.
The Subprime mortgage crisis concern to increasing number of foreclosures in the end of 2006 and ı can say during 2007 which constituted a series of negative impacts on whole mortgage industry and it was effect US economy. Rising monthly mortgage commitments for the borrowers which applied in the past few years for adjustable rate mortgages resulted in forced eviction of many US families from their homes. Rising interest rates and speedy decreasing house prices are making almost impossible for consumers with not so good credit rating to get a mortgage loan or to refinance present one getting in default and this situation is affect many prime borrowers negatively. Many marginal private banks and subprime subsidiaries of large financial institutions are shut down and thousands of employees in mortgage sector are laid off.Millions of people effected this destructive situation. Most experts claim that:
-)2 million foreclosures as a result of resetting adjustable interest rates
-)$71 billion in housing related losses resulted from those 2 million foreclosures and $32
billion losses as a spillover in neighborhoods with many foreclosures
-)$2.3 trillion loss as a result from 10 % decrease of real estate prices
-)$1 billion loss from decreased value of property tax assessments
Over The past five years Banking&Finance system have tended applying diffrent ways to expand inmarket bigger then before.
One of the biggest instruments in market was Mortgage.By the way private sector has created big-bang with Sub-Prime model.With this model banks have opened big profit way for themselves.The burning question was "Why is this model more attactive then traditional model?".In fact answer was so easy ; Private Sector has let barrowing for the people who has poor credit histories and weak documentation of income.In other words they were marketing a new life for them.When we check Mortgage Bond Market Diagram distressed debt is %58 of total Mortgage Bond Market.Especially example of Sub-Prime Crises in Cleveland explanins everything with details.Sub-Prime Landing+Black Areas+Foreclosures+Deutche Bank proporties Diagram is the map of Sub-Prime personality in long-term.In Cleveland example Mortgage brokers did not tell the log-term plan of this model well enough to the barrowers.After two years people have faced big problems because of high interest rates.This problem has fired the crises.Before "After two years problem" everything was fine as it was in all America.In this point FED did not make provision for the crises.Near to crises FED has tended to prevent market from the economic depression but it was too late.Banks were getting an evolution being a real estate agent and loosing big amount of money.
Meanwhile Sub-Prime mortgage bondholders were loosing money.Value of assets have fallen more then %40 in a few months.
When we assemble all the points mentioened above ; it is the crises of Banks who are willing to create world of unreality to hopeless people who has no place in Banks unreality world.
EREN GÜZEY
Yes, Sonja exactly. Turkish people are worried about economic alternation and economic recession which change dramatically. As firstly I want to say that this week resembled to 2001 crisis that was in Turkish economic system. Because everyone was worried as you mention that.
As secondly, I want to mention from the USA and Iraq War which economic recession determines. As everybody knows there is an election in the US between democrats and republicans. Democrats supposed that Iraq War must be stopped. I agree with them. The war was prolonged, anymore. The USA has been spending lots of money for Iraq Conflict for five years. As Joseph Stiglitz, who is Bill Clinton’s economic advisor, wrote on his book called “The Three Trillion Dollar War: The True Cost of Iraq Conflict, Iraq War caused the USA to lost three trillion dollar. Even though, some republicans cannot accept to this real, It is true cost. I know that to believe is so difficult. The world economic situation is up to the election which is going to be next November in the USA. I hope so Barrack will take measures against all of candidates. As J. Stiglitz said that Americans will decide what they want. Do they want gun or welfare? We do not know. We will wait and see what Americans want. But one thing should not forget that the recession, in the economy, can carry on, unfortunately.
There are two types of giving credit. ın old mortgage model: banks gave rock for people that have poor credit status. this credit system is between banks and the people who needs money.they borrow to buy home or open work place.
another system is subprime lending model. this model developed system of ol model. banks sell mortagage in market.people take the banks from mortagage bold.And than homebuyers pay banks in along time.It's for people who have poor credit status.However; they have to pay some interest rate to bank.
I think that banks promete crisis. Firstly the banks give the people who have poor credit status.They want to take money for profit more and more
I think that the banks are to blame for the credit crisis much more than individuals because when they give people credit, they know that these people who have bad credit status and not enough income to pay back, might default their credits. Moreover, the banks’ main target is to make more profit so, they determine high interest rates by giving mortgage to people who have bad credit status. On the other hand, people have to consider their financial conditions before they take credit because they must know that if they might default on their loans, the banks takes control of people’s houses. Therefore, borrowers should think about their loans more than one.
Mortgage was good idea in the short run, but unconscious mistakes about mortgage changed its purpose. For more commission, advisors did not explain to borrowers completely like interest rate (for first two year, interest rate is %4, but after 2 years interest rate will be %10. So borrowers can not affort this rate) As a result sub-prime borrowers can not pay their payment, banks is in crisis like Northern Rock. The crisis did not affect only USA or England, many countries (included Turkey) have been in this crisis. Due to globalisation.
In globalisation, nations related to each other, so sub-prime lending crisis in USA affect Turkey negatively like 2001 crisis. Decreasing dollar price and exchange market change Turkish people's life completely. So in global world, nations, companies or people can't make desicion alone.
i think it was a mistake of both sides.both banks and consumers.bankers should've seen it coming,and shouldnt give any credits to theese people who have bad credit history.and people should've been aware of all details of the contrat.because it will be them who will have to suffer just because of lack of information on the certain subject.in the end,banks can get what they want by warrant of distrain but it was not hard to see if they can make so many processes on time.as if any of you may thought my freinds,they just couldnt,as a conclusion they couldnt make the payments on time,and it ended up whit a mess.just as it was a mistake made by both of the sides,both had to suffer.but it was not only them who had to suffer.as a matter of fact,millions had to suffer,by the extensions of the globalization.this is how it went worldwide.
first of all sonja sorry about ı'm late to contrubute the discussion so ı want to answer your first question, subprime lending model is different from the traditional lending model. In subprime lending model banks give loans to the people who live in bad situations and whose financial situation is not good. So banks give mortgage people who have poor credit history. In long term bank give credits to the people but it is very risky for both banks and individuals. Because if individuals can not afford money and pay their loans to the banks homebuyers take a risky to foreclosed by the banks. And it also helps to increase the interest rates. On the other hand,if people default on their mortgages banks will go bankrupt. I want to answer your second question ı tihnk both of sides bank and borrowers are blame for the credit crisis. Because banks give credit who have a poor credit status and they take a risky for themselves but when borrowers would not payoff this monet they increase their rate to survive their bank. On the other hand people have no opportunity to own a house on this way they think that they will pay the money to banks when they earn more money. But it is so risky. Consequently if people can not pay the money to banks, banks can not pay to mortgage bond markets. So there will be a crysis.
Traditional mortgage model is consisted of home buyers and bank where mortgage lending is financed through the deposits which are given to banks by customers. Sub prime model includes mortgage bond market additionally home buyers and banks. In this system, firstly banks sell on the mortgages to the bond markets. Secondly, mortgage loans are granted to home buyers and when customers pays bank, repayments are given to bond markets by banks (BBC News). With the model of sub prime lending, many people have a chance to receive mortgage that have poor credit status and bad credit stories so a risky situation has appeared for both customers and banks because of high interest rates and adjustable mortgage rates which can not pay back by sub prime borrowers. As a result, most of this people have lost their houses, credit crunch has arisen, bondholders and banks have faced with large amount of losses and building industry have changed into a slowdown because there is not enough demand and purchasing power of borrowers to sell houses in this crisis atmosphere.
Banks should be blamed primarily because they are professional institutions which can predict about the future of payments of huge uncontrolled mortgages to customers who have not good credit status. Brokers are also guilty of making false advertising and nonfunctioning credit rating who earn high commissions from mortgages they have sold.
What are some examples of headlines which reflect the crisis of sub prime lending?
“Mortgage Crisis Spreads Past Sub prime Loans” (CNBC)
"U.S. mortgage crisis goes into meltdown” (London Telegraph)
“Sub prime Lending Crisis: Millions of Families Face Losing Their Homes to Foreclosure”(Democracy Now!)
“Help with the mortgage” (The Economist)
Lastly, US is the biggest power in world market, so it is an unavoidable result that many other countries would be affected from the crisis of US as in the example of the collapses and bankrupts of European banks in recent days.
ı thınk that, yes maybe the banks does not explain exactly Mortgage system the borrowers, maybe the borrowers think the interest rate will not increase , but we know that the mortgage system is common in US, to me, majority of US' people know something about Mortgage sytsem that's why ı don't think the borrowers are decoyed.ı thınk the economic crisis is natural because there is always risk in economy. Sometimes this situation is hazardous for sub prime borrowers.
About the blame for the credit crisis; I think nobody is blame for the credit crisis . People who have bad history want to buy a house so they borrow the money from a bank cos they haven't got enough money and they have to take a R�SK to buy a house because they have not a different choice.
In addition bank is not blame too; because they lend the poor people to buy a house and if borrewers can't pay the money, bank forecloses on their house . This situation cause the crisis but I think nobody is blame.
Sub prime lending model was invented for people who have poor credit status. Sub prime lending model is more confusing than the traditional one. The system has four stages. First bank sells mortgage bond and then grants it, then homebuyer pays bank and finally bank pays bondholders. The worst part of the system is high interest rates. It was invented for people who do not have enough funds for traditional model but it is not suitable for them too and banks have an opinion to rise the interest rates.
For the first question I think the governments are guilty. Banks earn money owing to interest rates. Of course they will take advantages of the system. But the governments have not done anything for those poor people. Only a president offered banks to freeze interest rates. This president was George Bush! Actually consumers did some mistakes. I think they did not research carefully.
For the second question the crisis affects home loans, auto loans and credit cards too. It is a general and global crisis. They are the highest rates since 1998 (in 1998 prime and sub prime mortgages were separated)and there people who can not afford the payment without selling their homes. In addition $500 billion was lost in 1980's and economists think that it will be worse now.
http://www.nytimes.com/2008/02/12/business/12credit.html
http://www.time.com/time/business/article/0,8599,1714725,00.html
I realize now, one question had been overlooked by me. The question is “Who do you think is to blame for the credit crisis?”
NEW YORK (CNNMoney.com) -- Treasury Secretary Henry Paulson said that
“Credit rating agencies, which have borne some of the blame for the credit crisis by not warning investors who bought subprime mortgage securities, were encouraged to practice greater due diligence when passing judgment on bonds and other financial products.”
Work cited: http://money.cnn.com/2008/03/13/news/economy/paulson/
I agree with him. Credit rating agencies should blame for the credit crisis and the credit market crunch. Credit rating agencies must protect investors and competition in the credit rating industry.
I would like to point out to everyone that the sources Burcu has posted - Democracy Now!, The Economist and the Daily Telegraph are all excellent and I highly recommend that you read them regularly.
I don't agree with Deniz Temel that all Americans understand the mortgage system. Think of first-time home buyers: how can they be expected to understand the system before they have ever participated in it? I have never bought a house and I certainly don't pretend to understand it well. People of course tend to trust the financial institutions that are advising them, which is why I say they have much greater responsibility.
It's great to see that many of you are checking headlines and sources regularly to keep following this issue - I hope you will continue after this discussion closes!
The traditional system was only for the people who have good credit status, can pay their debts on time and have a suitable job. Moreover, the people who want to have credit for having a house deal with the bank for mortgage. However, in the subprime model, the significant features of traditional one change. In the new system, not only people who have good credit status have the credit, because this model aims to give more credit to the people with poor credit status, having not adequate income, having problems for paying pack their debts. Furthermore in this model, banks take the credit from mortagege holders and then give the cash to the homebuyers. Therefore, the interest rates might not be constant and increase rapidly. This totaly affects the people who have the cash to buy a house and have poor credit status. After all, it is evident to have a crisis, foreclosures for homebuyers and bankrupt for the banks.
I think that bank is to blame for the credit crisis, because I believe that this new system is created for making more profit. Moreover, the banks should consider the credit status of the homebuyers and not give the cash to the people who have a poor credit status. On the other hand, I can not understand the people who have a poor credit status but try to have cash by risking and if they know that they would not be able to pay back.
In USA, there is a big loss about an insurer. MGIC(US mortgage insurer) loses $1.47bn (£750m) because of the housing slump and resulting high levels of credit crunch.
(BBC News)
Moreover, there is a slowndown in economy and and America is in a recession.
Well, I know that it is risky to have a credit in the subprime model for having a house if you are one of the people who have poor credit status. However, I wonder if there is a possible solution or suggestion so that the people who have poor credit status can have a house or a car?
I want to respond to Merve E.'s question: Is there a possible solution or suggestion so that the people who have poor credit status can have a house or a car?
I can answer the question about cars: In the USA, there is a system called leasing. People can "rent" a new or used car for a fixed length of time, for example 2years, for a reasonable monthly payment. All the driver has to do is ensure that they stay within a certain amount of mileage each year (how many miles the car is driven). If they drive more than the agreement, they pay a bit more. At the end of the term, the driver can trade in the car for another one and a new lease.
This helps many people to afford nice and new cars.
It is of course also possible to buy good quality used cars at reasonable prices.
I think banks which are belong to government should rebuild a new system. However, its interest rates mustn't be high.
The best solution to make people have a house is to provide them opportunities without cheating them with low interst rates at the beginning. The best opportunity is to have a house with payment driblets. The thing which is significance for people here is not to make interest rates soar in an instant by shocking all borrowers.
Mortgage is a legal agreement by which mostly a bank lends people money to buy a house, car etc. The traditional model of mortgage lending can be taken out by people who have good credit status. In other words, the person should have an adequate income and financial reliability to take out the traditional model of mortgage.
The sub-prime model is different than the traditional model and only given to the people who do not have a good credit status. Therefore, it is an advantage for those who do not have a good income and financial reliability because this is the only way for them to own a house. Moreover, it is possible that they can erase their bad credit history if they can pay all their payments on time. However, it is more risky comparing to the traditional model because if they are not able to manage to make all their payments on time, the bank foreclosures on their house and additionally their credit status can get even worse. Furthermore, it can also affect the bank that if many people default on their mortgages, banks could go bankrupt. Actually, this is quiet possible that any person who does have a bad credit history because they can lose their jobs or the interest rate may increase suddenly.
Now, the U.S. economy is in recession. The reason is the credit crisis which began when U.S. mortgage companies started to supply loans for people who have poor credit status. Now, these people get worried about the mortgage repayments and there occur an economic slowdown in the market when this downturn occurs in the big exporting countries such as U.S., it affects the whole world and causes a world-wide recession. At this point I wonder, if any of you have an idea about preventing the recession in the U.S. expand and become a depression?
Subprime lending moedel is for people who have a bad credit history and have a poor credit status. There is a mortgage bonds in this mortgage system. In this system, The bank give credits to a lot of people to buy a new house, because the banks take the money from mortgage bonds. People want to buy a new house but their financial situation and credit history is poor. Sub-prime lending system is for these people. But this system has a risky to borrowers, also banks have a risky. Because the interest rates can increase suddenly and the borrowers can't pay their loans so banks foreclose their houses. It is also risky for banks because if a lot of people couldn't pay their loans, the banks will bankrupt.
The traditional model is for the people who have good credit status, have sufficient income and can pay back theri debts. Also this model is between the bank and the homebuyer, because the homebuyer can have a cash from the bank and then pay back to the bank. However in the new model, subprime lending model, the bank takes the mortgage from the mortgage holders and gives the cash to the homebuyers. Furthermore, there is no limitations for the people's credit status. The bank can give the cash to the people who have poor credit status. At this point one of the major problems might be the rapid increase in the interest rate and so the homebuyer can not pay back the cash that he/she takes from the bank for having a house or a car. Hence, the crisis takes place for the bank and the homebuyer because of the foreclosures of the houses and bankrupt.
I believe that in this crisis, we should blame the banks that alter the traditional system for taking advantage of the increase in the interest rate and making more profit. After all we can also blame the homebuyers who know their situations that they are not able to buy a house or car by taking risks, because they have not adequate income in order to pay back the credit.
According to the economic forums and the headlines of BBC, America experiences really huge slowdown in its economy and it faces the true credit crisis and recession.
You have mentioned about the leasing system for Merve's question. I have heard the same thing. In Us especially for the students who go to a college can have second hand and cheap cars. However I do not know if this kind of system is avaiable for the house problem.
For Deniz's questions, I think that there are many economic forums in US for preventing this recession depending on my readings on BBC and some headlines from diverse media sources. I believe that the best solution for this problem might alter the new mortgage system and have the old one again but I am not sure about it. It might be a really deep and helpful question for taking a step in order to prevent the depression. If we consider that we are living on a globalised world, it is evident that this crisis would probably affect Turkey. What do you think about it??
Subprime lending model is very different the other traditional models.This model contains that subprime model, firstly bank sell the mortgage bond in the bond market after this bank give the mortgages to subprime borrowers and homebuyer pays bank and bank pays bondholders.
Subprime lending model is a poor credit states. As we understand, it is given people who has less income. Thus, there is a risky stiuation for banks because subprime borrowers could not pay back the lending money because of high interest rate.
Subprime model has two kind of sysytem. One of them is people borrow the money from bank. Other one is bank sells mortgage bond and bank grants mortgage.....
Finally, somethings went bad. Because of high interest rate, people could not pay their mortgage instalmentant so mortgage crisis has appeared.
I think that blame is bank because they lend lots of money to the subprime borrowers who are not able to pay back the money even can not pay teir bills. Brokers are also blame about this crisis because they arrange the morgage between bank and borrewers who are not able to pay money back.
I claime that motgage risky has appeared in USA but it is waited to affect all over the world. Thus, countries try to protect their economy from this crisis. For instance; Bush suggest to freeze interest rate for 5 years and so on. Turk economists also try to find some solutions to prevent motgage crisis. However, I read a news about Turks government's attitude for this crisis, they mentioned that government sure about crisis will not affect Turkey because they believe that EU and other countries try to stop crisis. I can not remember the name of the newspaper so I can not give a reference.
As we see and read on the news motgage crisis slowdown US economy it is obvious that the world economy will be effected from it. Hopefully it will be stoped.
This blog discussion is now closed. Thank you to all who participated, making it our biggest blog discussion yet at 86 comments!
I was pleased to see that so many of you can explain subprime lending and that you are using the Economics vocabulary we learned in class. Furthermore, many of you showed that you are checking headlines and news reports. This crisis is not going to end anytime soon, so it's important to follow it. It has already seriously affected Turkey.
Be careful about blaming subprime borrowers for this crisis. When they take out the mortgage, they can "afford" it. Some of you seem to think that they "know" they cannot afford it. This is not necessarily true.
One point about the structure of the discussion: When I change the question, I do so to prevent the discussion from becoming boring. Therefore, just respond to my LATEST question (or your classmate's latest question) when you log in. You do NOT need to answer ALL the questions in the discussion.
Good work overall and I enjoyed reading this. I hope you did, too.
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