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what does sub prime housing in the USA mean?

(9 Posts)
ssd Thu 19-Feb-09 08:11:13

keep hearing this im the news and don't know what it means!

mankyscotslass Thu 19-Feb-09 08:14:48

OOOh glad you asked this.
I always thought it was a bit like the self certificating mortgages over here. Basically people who couldn't get mortgages from standard lenders for various reasons (self employed or poor credit rating or over stretched), borrowing against the certainty of house price increases.
But now I'm not to sure and feel a bit blush to ask.

ABetaDad Thu 19-Feb-09 08:20:54

The subprime mortgage category in the US covers borrowers who typically would never have got a mortgage in the past and are essentially the riskiest category of borrowers.

The types of mortgages it covers are Self Cert and Low Start mortgages which jump up to much higher rate in later years. They also include mortgages with zero deposit down. They are called different things in the US such as Alt-A, Option Arm, Exploding-Arm and so on but they are similar to mortgage products here and have the same risky types of borrowers.

In other words it is just the same mortgeg borrower categories that have gone wrong in the UK. The Govt and UK banks for a long time said we did not have subprime in the UK like the US - we do.

scienceteacher Thu 19-Feb-09 08:22:09

It means lending to subprime borrowers - borrowers who are a high credit risk.

It was fine when the market was rising, because any defaulters could be absorbed. But defaulting in negative equity means that the lender is out of pocket. When this happens on a large scale, confidence goes down, spending decreases, jobs are lost etc etc.

What has turned this American Subprime problem into a global one is that financial institutions buy mortgages from others so that they get a share in the interest payments when things are going well.

mankyscotslass Thu 19-Feb-09 08:25:15

So I was right for once! grin

blueshoes Thu 19-Feb-09 08:42:43

We definitely have sub-prime in the UK. Those mortgages were called as such and routinely securitised and repackaged.

As other posters have mentioned, subprime borrowers are borrowers other than 'prime' ie at higher risk of default.

Could be that they cannot show proof of income (including self-cert), have a number of CCJs, previous history of default.

scienceteacher Thu 19-Feb-09 08:49:24

I always thought our subprime lending wasn't as bad as it was during the 1988 boom and 1989 crash. In those days, they would lend you more than the cost of the property, and humungous salary multipliers. I thought both lenders and borrowers had learned their lessons, although I imagine with the steep rise in the housing market in recent years has made everyone complacent.

The current crisis was brought about by banks buy debt from one another and therefore global companies being exposed to local risks, without having any control over them.

ssd Thu 19-Feb-09 09:42:01

thanks

SalmonFromTheLiffey Thu 19-Feb-09 09:50:11

This is a good question, and if this problem originated in USA, then I am wondering if our sale/rental comparisons will also eventually step completely into line with theirs.

In America, a house's sale value is understood to be about the same as it would take in in rental over 12 - 14 years. So a 3 bed house over here that takes £1,200 a month shouldn't be sold for more than 180k.
But near me, houses in new developments are rented for 1,200 a month and they are looking for about £345k sale.

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