What does the subprime market have to do with you?
I just watched Jim Cramer take a fit on television. Here it is.
This video was made afterwards and Jim spends some time explaining why he reacted the way he did.
Subprime refers to mortgages or loans to lower quality borrowers. These loans have a value and are bought and sold, so we can say there is a "subprime market". Banks like to do this because there are limits to the amount of money they are permitted to lend (a ratio based on cash and other assets on hand) and by selling the mortgage they now have more cash to do what they like to do (lend us more money).
Some of the fundamentals have recently changed. Several years ago the U.S. real estate market was booming so people were refinancing their existing homes to pull out equity. Others were buying homes they could not afford with exotic mortgages (i.e. "interest only", "liars loans" and what has to be one of the most diabolical "the "negative amortization loan"). Many of these mortgages were sold with "teaser rates" (i.e. an initial low interest rate that would reset to a much higher interest rate after the introductory period) that made sense in a market that was growing. You could always get a new mortgage based on the new higher equity value of your home! Unfortunately the U.S. residential real estate market is not growing like it was so people are not able to renegotiate as easily as they thought and many are losing their homes. This is compounding the problems in U.S. residential real estate and further dampening property values because there are so many motivated vendors.
Absolutely fascinating; but in all seriousness who cares! This is happening in the United States why should that have an impact on us here in Canada? The answer to that is superficially simple Financial Contagion.
Here is a brief clip from a Bloomberg article:
Central banks in the U.S., Europe, Japan, Australia and Canada added about $135.7 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.
The Federal Reserve, in a second day of action in concert with the European Central Bank, provided $38 billion of reserves and pledged further funds ``as necessary,'' in a statement unprecedented since the aftermath of the Sept. 11, 2001, attacks. The European Central Bank loaned 61.05 billion euros ($83.6 billion) after injecting a record amount yesterday.
The central banks are responding to the 'liquidity crisis' by making extra liquidity available. Let's hope it works! If it doesn't then we can expect a period of time where it is difficult to get new loans and those that are able to get them will be forced to pay a higher interest rate (note: the Fed's focus is on inflation which in my experience has always meant that they want to continue increasing interest rates).
So, what does the subprime market have to do with you? Well that really depends on what you intend to do in the next couple of years!
This video was made afterwards and Jim spends some time explaining why he reacted the way he did.
Subprime refers to mortgages or loans to lower quality borrowers. These loans have a value and are bought and sold, so we can say there is a "subprime market". Banks like to do this because there are limits to the amount of money they are permitted to lend (a ratio based on cash and other assets on hand) and by selling the mortgage they now have more cash to do what they like to do (lend us more money).
Some of the fundamentals have recently changed. Several years ago the U.S. real estate market was booming so people were refinancing their existing homes to pull out equity. Others were buying homes they could not afford with exotic mortgages (i.e. "interest only", "liars loans" and what has to be one of the most diabolical "the "negative amortization loan"). Many of these mortgages were sold with "teaser rates" (i.e. an initial low interest rate that would reset to a much higher interest rate after the introductory period) that made sense in a market that was growing. You could always get a new mortgage based on the new higher equity value of your home! Unfortunately the U.S. residential real estate market is not growing like it was so people are not able to renegotiate as easily as they thought and many are losing their homes. This is compounding the problems in U.S. residential real estate and further dampening property values because there are so many motivated vendors.
Absolutely fascinating; but in all seriousness who cares! This is happening in the United States why should that have an impact on us here in Canada? The answer to that is superficially simple Financial Contagion.
Here is a brief clip from a Bloomberg article:
Central banks in the U.S., Europe, Japan, Australia and Canada added about $135.7 billion to the banking system in an attempt to avert a crisis of confidence in global credit markets.
The Federal Reserve, in a second day of action in concert with the European Central Bank, provided $38 billion of reserves and pledged further funds ``as necessary,'' in a statement unprecedented since the aftermath of the Sept. 11, 2001, attacks. The European Central Bank loaned 61.05 billion euros ($83.6 billion) after injecting a record amount yesterday.
The central banks are responding to the 'liquidity crisis' by making extra liquidity available. Let's hope it works! If it doesn't then we can expect a period of time where it is difficult to get new loans and those that are able to get them will be forced to pay a higher interest rate (note: the Fed's focus is on inflation which in my experience has always meant that they want to continue increasing interest rates).
So, what does the subprime market have to do with you? Well that really depends on what you intend to do in the next couple of years!
posted by ONeil | 1:01 PM
1 Comments:
The subprime crisis has created some great opportunities for investors to buy properties at deep discounted rates. This is an unprecedented time to make some very smart investments in properties that are totally undervalued.
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