The Credit Crunch And Subprime Lending Explained
The credit crunch came about because of subprime lending. But to understand why, you will need subprime lending explained. Subprime lending is lending to people who do not have a clean credit history. They maybe had debts and arrears in the past and are now risky borrowers. Or maybe it is lending to someone who simply does not have a lot of money. They may have little or no equity in their home or they might not earn a lot. So subprime lending is special – there are greater rewards and greater risks. That’s subprime lending explained. The problem was over the last five or ten years subprime lending got too easy and the rewards got too great, which led to a big crash.
So how are the credit crunch and subprime lending explained? Well, a lot of the world economic markets rely on mortgage lenders. Mortgage lenders have a lot of income – thousands or millions of mortgage repayments from all over the world are being put into their bank accounts and that is very inviting to financiers who do not deal in real money. The mortgages are bought and sold and borrowed on, which is fine if the mortgages are paid each month. But the problem was that, especially in the USA, unscrupulous mortgage brokers and lenders were selling subprime mortgages to people who could not afford them. But that isn’t all of the credit crunch and subprime lending explained.
More and more people stopped paying their mortgages. In the USA you can simply leave your home, post your keys in the letter box and never return. This meant mortgage lenders were all of a sudden very much in debt. They had no money coming in from all of the subprime mortgages they sold, and as a result all of the other financial institutions had no money either. Everything is borrowed on everything else. It’s how the world finance markets work. But if something went wrong, and millions of bad subprime mortgages explained the credit crunch.
But that was last year and subprime lending explained that, but what about now? Why can’t you get credit a year after the US subprime borrowers stopped paying their mortgages? Because it takes a long time for all the bad debts to leave the markets. Subprime lending explained why we got into trouble, but now the world markets must work hard to find a way out. Governments are putting money into the bad mortgages. Some businesses are going bust because of it. But simply, bad subprime lending explained the credit crunch. And you can be sure it will never happen again.
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