Subprime Crisis Background Information

Topics: Subprime mortgage crisis, Mortgage, Debt Pages: 22 (8317 words) Published: August 28, 2012
Subprime crisis background information
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Main article: Subprime mortgage crisis
This article provides background information helpful to understanding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved are affected by the crisis. Contents

1 Subprime lending
2 A plain-language overview
3 Stages of the crisis
4 The subprime mortgage crisis in context
o4.1 Subprime market data
o4.2 Household debt statistics
o4.3 Financial sector debt statistics
o4.4 Credit risk
5 Understanding the risks types involved in the subprime crisis •6 Effect on corporations and investors
7 Understanding financial institution solvency
8 Understanding the events of September 2008
o8.1 Liquidity risk and the money market funding engine
o8.2 Key risk indicators
9 Credit default swaps and the subprime mortgage crisis
10 Effect on the Money Supply
11 Vicious Cycles
o11.1 Cycle One: Housing Market
o11.2 Cycle Two: Financial Market and Feedback into Housing Market •12 Understanding the shadow banking system
13 References
14 External links

[edit]Subprime lending
The U.S. Federal Deposit Insurance Corporation (FDIC) has defined subprime borrowers and lending: "The term subprime refers to the credit characteristics of individual borrowers. Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories. Subprime loans are loans to borrowers displaying one or more of these characteristics at the time of origination or purchase. Such loans have a higher risk of default than loans to prime borrowers."[1] If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called foreclosure. [edit]A plain-language overview

Factors Contributing to Housing Bubble - Diagram 1 of 2

Domino Effect As Housing Prices Declined - Diagram 2 of 2
The following is excerpted (with some modifications) from former U.S. President George W. Bush's Address to the Nation on September 24, 2008:[2] Other additions are sourced later in the article or in the main article. The problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad. This large influx of money to U.S. banks and financial institutions — along with low interest rates — made it easier for Americans to get credit. Easy credit — combined with the faulty assumption that home values would continue to rise — led to excesses and bad decisions. Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on. Both individuals and financial institutions increased their debt levels relative to historical norms during the past decade significantly. Optimism about housing values also led to a boom in home construction. Eventually the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell. And this created a problem: Borrowers with adjustable rate mortgages (i.e., those with initially low rates that later rise) who had been planning to sell or refinance their homes before the adjustments occurred...
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