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What is Subprime Lending

The median price of a new home in April dropped 0.9 percent from a year ago to $236,100. ... If the home owner wants to sell within 18 months after buying, the ...

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What is Subprime Lending

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  1. What is Subprime Lending? High-interest-rate loan for people with poor credit. “Subprime” borrowers.

  2. What are the risks? By definition, these borrowers are higher risk because they have yet to establish “good” credit. There is a high risk for both lender and borrower.

  3. What is a housing bubble? Artificially inflated prices that eventually drastically drop. The housing bubble burst, making it very difficult to refinance.

  4. Has this happened before? In the 1980s, the Savings & Loan market experienced similar problems. It is believed to be the cause of a recession in the early 1990s.

  5. Government’s Role “It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford.” – President George W. Bush He discussed a plan to bail out citizens, especially those with good credit.

  6. Who is affected? It’s a misconception that just the poor are directly affected by the subprime market. There are those who believe some lenders are inherently racist.

  7. The Housing Market… Statistics Single homes, new homes, locations. Speculations Background. Foreclosures Marion Gardner’s story.

  8. Statistics… • Single Homes: • When compared to last year, sales of existing single family homes fell 8.4 percent, to about 6.5 million. • New Homes: • The median price of a new home in April dropped 0.9 percent from a year ago to $236,100. • The median price of an existing home in May dropped 2.1 percent from a year ago to $223,700. • Locations: • The West-sales were down 16 percent from last year • The South- sales were down 7 percent from last year • Midwest and Northeast- sales were down nearly 6 percent from last year.

  9. Speculation… • Definition: • The practice of buying and selling land or other property in order to profit by the rise or fall in their market value. • Background: • builders are putting in their contract a penalty of $50,000 if the home is sold within one year. • If the home owner wants to sell within 18 months after buying, the builder has the option of buying back the property at the original price.

  10. Foreclosures… • Definition: • Procedure whereby property pledged as security for a debt is sold to pay the debt in the event of default in payments or terms. • Cleveland, Ohio. • One in ten homes in the city is now vacant. • Marion’s Story…

  11. Foreclosures & Speculation… • Rentals: • San Francisco- the monthly cost of renting an apartment is 45% of the monthly cost of buying a home • In Washington, D.C.- rental costs are now just 59% of the cost of owning • In Miami- rental costs are 63% of the cost of homeownership,

  12. Effects on Economy Job Loss Less consumer spending Weaker stock market/wall street

  13. Hardest Hit GMAC Citigroup Inc. Merrill Lynch Other Companies: - Home Depot - Lowes

  14. Sinking US $Dollar Increased borrowing Higher cost of goods Less purchasing power Less Demand for $

  15. Reactions

  16. Global Economy Effects were seen in: - Japan - China - Britain - Italy - Spain - Germany - Canada

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