What is subprime lending
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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 l.jpg

What is Subprime Lending?

High-interest-rate loan for people with poor credit.

“Subprime” borrowers.


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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.


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What is a housing bubble?

Artificially inflated prices that eventually drastically drop.

The housing bubble burst, making it very difficult to refinance.


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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.


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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.


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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.


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The Housing Market…

Statistics

Single homes, new homes, locations.

Speculations

Background.

Foreclosures

Marion Gardner’s story.


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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.


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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.


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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…


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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,


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Effects on Economy

Job Loss

Less consumer spending

Weaker stock market/wall street


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Hardest Hit

GMAC

Citigroup Inc.

Merrill Lynch

Other Companies:

- Home Depot

- Lowes


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Sinking US $Dollar

Increased borrowing

Higher cost of goods

Less purchasing power

Less Demand for $



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Global Economy

Effects were seen in:

- Japan

- China

- Britain

- Italy

- Spain

- Germany

- Canada