Why the Sub Prime market failed!

The Globe and Mail has done a great job telling the story of the collapse of the Sub Prime Mortgage market. You can read the whole story here or hang out here for my summary.

When the real estate market in the US was extremely hot a few short years ago. People were getting loans to buy homes with no documentation, less than stellar credit, financing more than the purchase price, qualifying for the loan based on a discounted teaser rate and investors were buying these loans up like they were going out of style. They were betting that the market would never cool off and home values would continue to rise, probably using the old adage ” they are not making any more real estate”. However what they failed to realize is that some of these people could not afford to continue making payments. 

Reality set in last year when investors started to loose interest in buying ABCP from lenders whose pools of mortgages presented too high a risk. This combined with adjustable rate mortgages resetting to higher limits forcing people into foreclosure, created the perfect storm in the real estate market. People were loosing their homes, investors were loosing the shirts and those on the sidelines were unable to get in the game as sub prime and prime lenders were dropping like flies. 

The end result is that the consumer has fewer options available to them for financing their home. However the strange part of it is that there is a silver lining. The lenders with questionable lending practices are now gone and homes that were out of the reach of some people are becoming a possibility. So do your home work and consult an investment advisor like my friend Steve 

before investing your hard earned money and when you buy your house make sure you leave your self room to live as well.




2 replies
  1. Pat
    Pat says:

    The media did not tip anything over, the just reported what had happened. The mortgage lenders had very soft lending guidelines recently and as a result almost anyone who wanted a house could buy one. The problem started when those who were given their financing on the teaser rate or discounted rate instead of qualifying on posted bank rate, when their rates reset they were no longer able to make the payments. Banks make their money by selling off their ABCP (Asset backed commercial paper) or MBS ( Mortgage backed securities) to investors. However when mortgages are defaulting they can not sell the paper. The effect then snowball’s and has now started to effect the economies of those in the States, us in Canada and those in the UK ( Northern Rock being an example) and other countries as well. How this will end is anyone guess, but all eyes will be on the US congress this week to see what help they may be able to provide our ailing markets. I hope this helps.

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