Category Archives: Stock Market

The Downfall of the Sub-Prime Market

Considering how prices dipped for housing in both 2007 and 2008, it was not difficult to see what was on the horizon. Smaller price tags enticed potential home owners into making their first purchases. However, the credit histories of these buyers weren’t always quite up to snuff, so to speak. Borrowers either had loads of credit card debt or simply did not have enough money to cover their monthly payments. Whatever the reason, the evolution of sub prime lenders had begun, and, in hindsight, one did not exactly not need a crystal ball to predict the results.

Sub Prime Lending

When new home buyers started to enter the market, many were not the ideal applicants for mortgage loans. Most did either not have good credit history, had previous bankruptcies, high credit card balances, or other blemishes on their credit records, making them less than ideal applicants for home loans. However, sub prime lenders offered home loans to these applicants despite these issues. In offering these loans to borrowers that could not acquire them elsewhere, lenders were able to charge much higher interest rates that borrowers were going to have to pay back.

What Happened?

There are several things that happened in the sub prime market in 2007. The year began with higher values for homes, leading people to want to sell their home quickly. Homeowners put their homes for sale on the market at higher prices, but with the slower economy, people were not buying homes as quickly as they previously were. Consumer confidence was progressively lowering, meaning that people were less than likely to purchase a home because they saw it as a financial risk.

Subsequently, more people wanted to buy homes, but they did not have the money to do so. This is where subprime lender enters the equation. These lenders jumped in and helped these high risk borrowers get into the housing market. But since these borrowers didn’t have the financial skills to manage the high and ever-changing interest rates, they often defaulted on their loans, causing the sub prime lenders to lose a lot of money.

The increased number of foreclosures on homes drove the housing market even further into the buyer’s market as sellers were unable to sell their homes for the actual values.

What Happens Next?

There’s no way to determine what will happen next in the unpredictable housing market. As the supply of available homes begins to diminish, homes will increase in price causing the buyers to be less likely to make risky loan arrangements – like those in the subprime and reverse mortgage market. It is very important, however, that the problems of the housing market aren’t exacerbated by policies made on the federal and state level. Nor should the government undermine the ability of moderate-income households to access mortgage credit and homeownership.