What is Subprime?

Many readers have contacted us regarding more information on the subprime commotion. This is not an isolated incident, and must be understood in the context of our general global economy. The Q & A below is helpful when trying to understand the depth of the problem of the subprime. The link to the whole article is in teh post below. For your convienience, it is here as well.

Q: Isn't this just a small part of the mortgage market?

A: Subprime mortgages totaled $600 billion last year, accounting for about one-fifth of the U.S. home loan market. An estimated $1.3 trillion in subprime mortgages are outstanding. That's nearly as large as the entire California economy.

Q: What went wrong?

A: Subprime lenders made too many loans to borrowers who didn't earn enough to make the monthly payments. In some cases, lenders didn't even bother to verify borrowers' incomes.

Some of this trouble might have been avoided if home prices had continued to climb like they did from 2000 to 2005. As a home appreciates, even borrowers who aren't paying the principal loan amount build up equity. That would have made it easier for subprime borrowers to refinance to a low interest rate.

Q: Could the subprime mortgage market's misery infect other parts of the economy?

A: In a worst-case scenario, the wave of anticipated defaults on subprime mortgages and tighter lending standards could combine to drive down home values.