I admit I’m a little confused. Does it refer to people who will default on a loan and not pay, or is it a poorly funded loan?
If it is the former, what exactly is wrong with a little deflation in the housing market. It will allow first time buyers a way in, and in time the market recovers its losses. Housing value goes down, demand goes up, housing value goes up...
subprime is the rate you pay if you are percieved not to be a good risk, and is an interest rate that is typically higher than what the average consumer pays.
The problem is, the absolute exorbitant prices that have been paid for what is really not all that great real estate. Someone in California got, for a patch of land and a mobile home, something like 1.7 million dollars a few years ago, and that had purchased it, I think a year before, for $900,000.
It’s a real estate market that is nuts, and inflation that has gone into overdrive. And then people have been taking out even more loans against the property they have, trying to capitalize on equity. It’s all based on money that is not really there, and it is going to come crashing down, and it’s going to be disastrous in some areas, but more than that, the fact that alot of national mortgage companies are leveraged into this insane markets.
It’s a recipe for disaster, and it reflects in general the problem of the 1990’s onward economy. With the exception of a few small recession, we have been on economic full blast since the mid 80s. Because of government controls on the economy, we have eliminated deflation as the corrective measure that it used to be. Well, till now, but it’s only going to be a real estate deflation, which is going to bankrupt alot of people, while other prices keep rising.
The only thing that kept the 70’s from being deflationary were the various government controls we instituted after the New Deal to stop deflation. Problem is, the New Deal was meant to be temporary, it’s now permanent and it is setting up what could possibly be a worse economic collapse then that period. No politician has the courage to tell the average American worker that if they lack a college degree, their income in real value, has probably reached it’s eternal peak, we’re in a world market now. Non-college educated Americans will have to get used to lower wages.
But this is all going to have to happen with us taking a severe economic hit that I don’t think this generation is ready for. One thing the deflation and correction of the thirties did, salaries that no one would take in the 20’s, people were greatful for in the 40s. The correction hurt, but, in the end it made our economy stronger and helped equip us to defeat the Nazis. I think the next decade will prove what the entitlement generation is made of.
That is what the Subprime market is essentially. People who have little credit history or not so good credit fall under subprime. Subprime being high/adjustable interest and fuddy dutty financing. Its primarily the fuddy dutty financing that is coming to fruition. I don’t have a problem with it. It is how capitalism works. The greedy, fearful and stupid get smacked down. Then markets are brought back into harmony until another pendulum swing.
Subprime is a polite way of saying "people who shouldn't get a loan to begin with." In years past, people would have been denied outright for home loans, because the bank knew they would likely default. With subprime lending, they gave people questionable loans, either more than the borrower could realistically afford, or given to borrowers that would likely default (ie, had bad credit).
Bottom line is that the Gods of the Copybook Headings will not be mocked.