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Subprime - Could someone educate me....????

post #1 of 12
Thread Starter 
I am having problems understanding the credit crisis.
1. How the subprime market has such a significant impact on financials. What % of loans originated were subprime?
2. With all the foreclosures happening now, people are obviously not able to make their mortgage.
Why would they not go out and get second jobs? Would'nt that be reflected in the economic reports?
What about their credit? If they cannot afford their house, wouldnt their credit go bad assuming they are having a hard time meeting their bills?
Could we use the 3 main credit reporting angencies as a proxy to see just how hard people are hit?????

post #2 of 12

post #3 of 12
The gov't is going to bail out these people so they can just walk away without any damage to their credit. That is the absolute corruption in our gov't. We are going to pay for the guys who were flipping homes for a profit. Now we are telling them that there is no more risk in the markets...you can just walk away from it.
post #4 of 12
Originally Posted by StockJock-e View Post
Hahaha. I saw that on forexfactory some time ago.
post #5 of 12
Thread Starter 
thanks guys...
to me, it seems that subprime mortgages have a disproportionate effect on the effect they have...companies are writing down HUGE sums of $$$$??? what gives? you would think that ALL mortgages are in default...?

post #6 of 12
Subprime probably represented about 4% of the market. But on one bad loan, they are typically taking a bath on 50% of the price of the home. That one bad loan can wipe out the profits from dozens of other similarly priced mortgages. If banks have to foreclose on more than a couple percent of their mortgages, they are gonna lose big bucks.
post #7 of 12

part 1

2008: Full global impact phase of the Very Great US Depression
- Public announcement GEAB N°21

One year ago, LEAP/E2020 anticipated that the year 2007 would mark the US entry into what our team then called “the Very Great US Depression”. At that time, the dominent spirit was overwhelmingly euphoric. The word « subprime » was still unknown among the general public and experts estimated that the US housing crisis would bear no consequences for the rest of the US economy (and they simply refused to very idea that it could have the least global impact).

In the course of 2007, facts however proved that a global systemic crisis was indeed throwing down all the principles the global economy was based upon since 1945; and that, along with the GEAB's analyses in September 2007 (GEAB N°17), the seven sequences of the impact phase of the global systemic crisis would simultaneously reach climax in the course of the year 2008.

One aspect, and a catalyst, of this global systemic crisis is the United States' stepping into an unprecedented (1) socio-economic crisis in 2007, hitting hard on households (2) as a result of the housing bubble burst and of their increasing insolvency, soon followed by financial operators' insolvency, due to the pure and simple evaporation of USD hundreds of billion-worth in assets.

In 2008, in addition to these two types of US players, companies will be hit as are caught in the crossfire between credit crunch and the collapse of housedold consumption, as well as public organisations whose fiscal revenues crumble. From now to this summer in particular, the financial crisis triggered by the US subprime mortgage loans will turn into a much wider-ranging crisis involving the implosion of the Credit Default Swaps (CDS) market. This will represent a now tipping point in the impact phase of the global systemic crisis (see detailed analyses in the rest of this announcement and in the GEAB N°21 - upon subscription).

Asia, Europe and emerging countries in 2008 – Direct but mitigated impact of the Very Great US Depression: Recession, stagflation and Western financial institutions taking control
Simultaneously, the diving of the US into the Very Great Depression will bear a full direct impact on global economy altogether:

. The Eurozone will step into a perdio of stagflation while the rest of the EU (UK in the first place) will be sucked up in a recessionary process. Denmark (and probably soon after Sweden) are preparing to join the Eurozone, as Prime Minister Fog Rasmussen (3) clearly expressed who recently resurrected the idea of holding a referendum on the Euro. These two countries are aware that the Eurozone will not cause any difficulty to their joining (under the Treaty, Sweden should in fact already be part of the Eurozone because it is required to adopt the Euro at a certain time) (4).
post #8 of 12
part 2

This sudden Scandinavian craving for the single currency is not the result of any recent conversion to the merits of European integration, but their growing awareness of the magnitude of the upcoming monetary, financial and economic turmoil, which could be lethal for small-sized economies not protected by a complete integration to larger entities.

On the East of the EU, many countries are striving to reduce the time needed to join Euroland. However the differences in economic situations are still too important for these countries to be fully sheltered when the tempest hits full shot in 2008 (even Denmark and Sweden are lagging behind events).

In fact the Eurozone will not present exciting prospects in the year to come, with a growth rate around 1 percent. But compared to the rest of the world, it will be by far the area least affected by the impact of the crisis. The risk of internal divergence among the economies of the Eurozone are obviously real (and our team often detailed their anticipations on this subject in recent issues of the GEAB), yet the overriding feeling today in the Eurozone is about preserving a currency that seems to protect quite efficiently the Europeans using it from external turmoil.

This situation will require from the ECB and for the Eurogroup to find most efficient means of cooperation, taking into account the expectations of both the public opinion and the various economies. In the last few months, anti-ECB political speeches (Nicolas Sarkozy's, in particular) became dormant. And, considering that Germany is also about to be affected by the EUR/USD rate (soon climbing above 1.50 and heading towards 1.70, before the end of 2008), all the players of the European monetary and economic game will be ready to move on. According to LEAP/E2020, this will take the form of a 2 to 3 percent increase of maximum acceptable inflation rate by the ECB.

Notes :

(1) Or rather ‘with a precedent' which most experts and specialised media often refer to, and that is the 1929 crisis and the Great Depression that followed in the 1930s. On this subject, the LEAP/E2020 team demonstrated in the previous issues of the GEAB that the present crisis if in fact much more serious that the 1929 crisis.

(2) If anyone still doubts that there is a recession in the US, we suggest he/she complies to the following simple exercise: enter the expression « december sales down; in Google and see the impressive list of companies from all sectors (retail sales, cars, electronic, furnitures,…) whose sales collapsed in December 2007, a month usually very profitable due to the holiday season.

(3) Source: Financial Times, 11/22/2007

(4) Source: European Commission, Economic and financial affairs
post #9 of 12
part 3

In the same category:
European real estate in 2008: Spain and UK deep into the crisis / Eastern Europe near housing bubble burst - 01/04/2008
Global systemic crisis – End of 2008: Pension funds go off the rails - 16/03/2008
How to survive with a euro worth 1,50 USD and an oil-barrel worth 150 USD? - 07/03/2008
Parameters and teachings of the « multi-currency » process of follow-up of the US GDP - 28/02/2008
Global systemic crisis / September 2008 - Phase of collapse of US real economy - 16/02/2008
Global economy in stagflation: Recessflation in the US, soft growth in Europe, recession (3rd quarter 2007 – 2nd quarter 2009) - 05/02/2008
Value of international academic degrees: How to choose today an international degree that will still be worth something in ten to twenty years? - 28/01/2008
Main characteristics and consequences of this US economic recession - 08/01/2008
LEAP/E2020 Alert: Breaking phase ahead for the global financial system in 2008 - 16/12/2007
International banks get dragged into financial crisis' « black hole »: Four triggering factors of a major financial bankruptcy - 16/11/2007
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post #10 of 12
Thread Starter 
Originally Posted by LuckyOne View Post
Subprime probably represented about 4% of the market. But on one bad loan, they are typically taking a bath on 50% of the price of the home. That one bad loan can wipe out the profits from dozens of other similarly priced mortgages. If banks have to foreclose on more than a couple percent of their mortgages, they are gonna lose big bucks.
thank you for the cliffs notes version!!

and QuestSolver thank you, I am still reading yours!
post #11 of 12
jlspeed, I'll make it easy for you:

there once were a bunch of folks WHO couldn't afford homes with a regular 30 year fixed rate. So mortgage companies got creative (i.e Countrywide Financial). They start creating ARMs (adjusted-rate mortgages) where the monthly payment starts low then increases as rates increased. (Please note that the rates were at 1% around this time). Well, you now have people that paying $600-$900 monthly with these ARMs (Note that these mortgages were geared so that you only pay the interest during the period of this ARM), where as the actual monthly prices should be around $2000. Now at $600-$900, these folks could barely afford this home, and for some, lenders even had to "ESTIMATE" income higher to get you in. With home prices increasing nearly 100% every year (yes it does happen, My brother bought his California home for $150,000 in 1999 and in 2004 it was worth $450,000), lots of investors wanted in on the action. Well, what happens when interest rates start increasing (the Fed increased rates from 1% to a high of 5.25% before this recent drop back to 2%)? As interest increases, homeowners monthly mortgage payments started to increase. And I'm not talking about $50 increase on a $600 payment. I'm talking about paying $600 1 month, and then having to pay $1500-$2000 the next month for that same house.

Caught all these folks by surprise, because they thought they'd sell the house for a value before having to pay this higher mortgage payment. What also happened was that ALL the Buyers were in, and just like stocks, when there' s no more buyers on the market, the selling starts....

Within 2 years, you still can't sell your house, the house value is now below your buying price, AND your mortgage is still increasing.....OUCH triple the pain. Most folks just walk away from the mess....the great thing about freedom here is you can walk away from your mess. Now on the banks sheet, how much are these homes hence, mortgages worth now? Surely they aren't worth $0, but because you can't put a price on these homes, banks will have to write them off as $0, and the losses start.....loss of $1B becomes a loss of $2B, and so forth. Sure, one day people will buy these same homes again, but I bet it'll be at a much lower price than what you still see listed.

Here's an example: I buy a house for $200,000, bank pays the owner $200,000 and gives me a mortgage. 2 years later, I can't pay the mortgage or sell the house and I leave. Some one comes and takes the house for $150,000. That's a clear loss of $50,000, and that's the number the bank absorbs. Have this example repeat itself over and over again and that's how we got to where we are now....this is all basics here....hope that helps
post #12 of 12
Thread Starter 
^^ got it!!! thank you!

wow what an impact!!! no wonder they are subprime!!!

so why dont these people all go out and get second jobs?
they'd rather be lazy and sit at home watching American Idol or the NBA finals!!
they should be out getting a job at starbucks or something to keep the lights on!

What about my "Credit Reporting" theory? could that work? in theory wouldnt peoples credit be taking a massive sh%t??

thank you to everyone for your answers!!!
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