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elisabeth n | Where is the logic in sub prime mortgage products? |
If these people ar high risk at 5% interest what qualifies them for the same money at a higher rate ....surely this is fraud. |
 |
 
Veritas
|
The increased rate is to protect the lender from the expectation of greater defaults by these high risk customers. However, I understand your point, because the whole thing got so out of hand, that they seemed to ignore risk altogether when agreeing these loans. May I add the following points of explanation :-
Employees within the Mortgage Banks who are charged with selling these products were trying to maximise their bonuses by lending as much money as they could. That made them lots of money, and the Banks performance pleased the 'City', that is, until the proverbial hit the fan, and then it was the shareholders/depositors who suffered. Basically, Banks were competing with other Banks, and prudence came second to sales. It was always going to end like this, and they all new it. Now, they are screaming to lower interest rates, so they can continue with their irresponsibility.
In Britain, Brown et al, has encouraged a housing boom and a borrowing binge over the last ten years. He has made no attempt to do anything about it, and he has emasculated the BOE to make sure that they couldn't do anything about it either. However, borrowers also have to take responsibility for what they are borrowing.
They have tried to blame it all on the American sub-prime, but this is nonsense, because we have our own sub-prime, and if it hadn't kicked off in America it would have eventually kicked off here, in fact, the problem would have been bigger, so they did us a favour. |
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jal
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No Elizabeth, it is not a fraud..
the thing is that the financing company is taking additional risk to lend to an individual with less than satisfactory credit scores. therefore, the company would want to be compensated for the additional risk that it takes. |
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roderick_young
 |
Only a certain percentage of people will be able/willing to pay their debts. If everyone was 100% guaranteed to do this, the mortgage rate should be the same, and low, for everyone.
However, suppose you have a group of people, out of which, 5% will for some reason never pay back their debts. If we knew exactly which ones these were, we wouldn't give them loans, but since we don't the only choice is to raise rates for everyone in that group, so that we don't lose money, overall.
The problem comes in how to figure out whether it's really 5% that won't pay, or 1%, or 30%. Grossly underestimating the portion of people that will walk away from loans leads to huge losses, like we see today. |
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Marky
|
The sub-prime fiasco are for mortgages in the US where the lending rate was around 1%. So, the banks lent to anyone and everyone as the rate was so low. These banks then sold the mortgages on to other banks around the world.
Then, went the interest rates went up, the people in America couldn;t afford to pay theri mortgages and defaulted. Then, the banks around the world who bought these mortgages off the American lenders (Northern Rock etc) are the ones who suffered.
Basically, it was the people boroowing in America, not us over here that has caused this. But, wehn America has a financial problem, then the whole world feels it. |
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garstard
 |
The one element of "fraud" that there has been experience of in the sub-prime crisis is the fraudulent completion of applications / declarations by applicants. They are contractually bound to make honest statements in their applications. Some people have not.
However, there are a number of sub-prime borrowers who have completed their applications genuinely and honestly. |
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▲ßûІІѕ vÅŸ ßèÄÅ—Ñ•â–¼
 |
thanks to those who abuse the credit system who can't afford what they desire.
the logic was..greed and money |
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Formerly known as Frank Castle
|
Examples:
100 low risk customers pay $5.00 each year to the bank.
Bank makes $450.00 (10 customers did not pay)
100 high risk customers pay $50.00 each year to the bank.
Bank makes $2,500.00 (50 customers did not pay)
100 very high risk customers pay $100.00 each year to the Mexican Cartels.
Mexican Cartels make $3,000.00 (70 customers died or went to prison)
It's just simple math.
It's not fraud. |
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SkEgY
|
no because the bank makes more money from higher interest rates which is there to cover there losses, when the loan to people considered high risk. |
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MM
|
Historically, higher interest is charged to hedge higher risk. That's the logic behind charging risky customers a higher rate.
Sub prime mortgages work ... for a time ... for the lenders. For a time, they make piles of money. They also have homes as collateral.
If a sub prime lender gets out of the game, before things go haywire, then you can bet their strategy was very successful. |
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