Subprime lending Crisis & the Stock Market Fall

Subprime Lending Crisis
& the Stock Market Fall
(次級按揭的危機和股票市場下落)

Prime loans
For years, borrowers in the U.S. could only get a mortgage for their homes if they paid a 20% downpayment and had stable incomes. These are called prime loans. This means the borrower pays the lowest possible interest rate to the lenders in exchange for the loan service. Normal lenders for home mortgages were banks, which are subect to strict banking regulations.

Subprime loans
Over the last ten or so years, though, many state-chartered finance companies have emerged that don’t have any bank deposits and don’t have to follow strict banking regulations. Rather then get their money from depositors, they get their money from investors on Wall Street. These investors have been willing to risk their money on the housing market because for a while it was looking strong. However, the subprime lenders have been very flexible in who they’re willing to lend to, and they have been willing to take higher risk than prime loan lenders. They have also made loans to borrowers who simply cannot afford to repay. This is especially true in the case where interest payments are low or prime in the first two years and then higher or subprime in the third and following years.

Why do people want subprime loans?
For most families, their house is their greatest material asset, so when they want to send a child to college, to pay for a medical procedure, or pay for some other large expense, they can take a subprime loan out on their house in order to borrow money for that purpose.

Why does the U.S. government allow subprime loans?
In the last ten years, the subprime loan industry has become a major, and controversial, player in the U.S. housing market. Under a subprime loan, customers with low credit ratings are offered mortgages in return for high interest rates. Proponents have advocated subprime financing as a way for low-income residents to own their first home.

What is the actual result?
For a while it looked like the lenders were making a lot of money, and it would be a win-win situation. The problem came when the more and more people got subprime mortgages, and lenders got reckless. Since it was a new industry, the federal regulators got behind in making laws to protect people. For instance, they were not making laws which required that borrowers can make their payments after two years. Also, some lawyers were not advising people well, and did not tell them clearly what to expect. They made money for their service, but the borrowers had unpleasant surprises later.

The Center for Responsible Lending estimates that between 1998 and 2006, about 1.4 million first-time home buyers purchased their homes using subprime loans. But it also says that the number of projected subprime loan failures in that same period was about 2.4 million. This means subprime lending results in a net loss of home ownership for almost one million families! When such a large number of people lose their homes, it also means that investors get nervous and sell their stocks, so stock prices go down. This has pulled the entire U.S. stock market down, and it’s brought other stock markets down with it.

Moral of the story
“The rich rules over the poor, and the borrower is servant to the lender” (Proverbs 22:7). Many people find out the hard way that borrowing is not a good thing. If you cannot repay, don’t borrow. It’s often best to save and wait. Also, if you must borrow, be sure it is for something that you expect to go up in value or provide greater future wealth, like a good piece of property or a university education. Finally, be careful to identify what you truly need and what you simply want but don’t need.