Last week, Wall Street closed lowerdue to subprime mortgage financial crisis. Now, what is subprime mortgage ?
In order to know this, we have to go onestep backward to subprime lending. Subprime lending means the act of giving loan to borrowers who are not credible at the best market rate. Not credible means that they have poor credit history. This kind of lending has a very high risk because it involves a) high interest rate b) poor history of borrower. (we can say this like Along who lend the money at a very high interest rate to the borrower who has a bad financial history).
The word 'subprime' refers to the lower standard of the borrower. Several types of subprime mortgage includes
a) interest-only mortgages. In this case, borrowers pay interest only for a designated period.
b) pick-a-payment loan. Borrowers choose to pay a lower amount of loan repayment that what they should pay.
c) the easy convert from fixed interest mortgage to variable interest mortgage.
The thing take makes subprime lending risky is because it is done by the legal financial institutions not Along. This is how it works.
An investment bank buy loans from other bank, repackage and sell them to investors around the world. Their customers are like hedge fund and pension funds (in Malaysia similar tu EPF). The crisis started when a company (lender) called "New Century Financial" voiced their concern that they dont think they can survive because they have $8.4billion loan repayment problem. Market became panic and reacted negatively to the news.
Adding to the worse was when NCF told that they got their source from big names such as such as Morgan Stanley, Citigroup , Bank of America and Goldman Sachs. These big names used NCF services (that repackage the mortgage) to lend them to investors. Other businesses that are active in buying subprime loans and repacke them are like Lehman and Bear Stearns have been among the most aggressive in the business of buying subprime loans and repackaging them for sale to investors. Morgan Stanley and Merrill Lynch (Charts) have jumped even further into the business, by purchasing subprime mortgage lenders outright.
But some analysts said that the market were overreacting over the news.
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