What is Subprime Lending

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What is Subprime Lending?

• High-interest-rate loan for people with poor
  credit.
• Subprime borrowers.

2
What are the risks?

• By definition, these borrowers are higher risk
  because they have yet to establish good credit.
• There is a high risk for both lender and borrower.

3
What is a housing bubble?

• Artificially inflated prices that eventually
  drastically drop.
• The housing bubble burst, making it very
  difficult to refinance.

4
Has this happened before?

• In the 1980s, the Savings Loan market
  experienced similar problems.
• It is believed to be the cause of a recession in
  the early 1990s.

5
Governments Role

• Its not the governments job to bail out
  speculators or those who made the decision to buy
  a home they knew they could never afford.
  President George W. Bush
• He discussed a plan to bail out citizens,
  especially those with good credit.

6
Who is affected?

• Its a misconception that just the poor are
  directly affected by the subprime market.
• There are those who believe some lenders are
  inherently racist.

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The Housing Market

• Statistics
• Single homes, new homes, locations.
• Speculations
• Background.
• Foreclosures
• Marion Gardners story.

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Statistics

• Single Homes
• When compared to last year, sales of existing
  single family homes fell 8.4 percent, to about
  6.5 million.
• New Homes
• The median price of a new home in April dropped
  0.9 percent from a year ago to 236,100.
• The median price of an existing home in May
  dropped 2.1 percent from a year ago to 223,700.
• Locations
• The West-sales were down 16 percent from last
  year
• The South- sales were down 7 percent from last
  year
• Midwest and Northeast- sales were down nearly 6
  percent from last year.

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Speculation

• Definition
• The practice of buying and selling land or other
  property in order to profit by the rise or fall
  in their market value.
• Background
• builders are putting in their contract a penalty
  of 50,000 if the home is sold within one year.
• If the home owner wants to sell within 18 months
  after buying, the builder has the option of
  buying back the property at the original price.

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Foreclosures

• Definition
• Procedure whereby property pledged as security
  for a debt is sold to pay the debt in the event
  of default in payments or terms.
• Cleveland, Ohio.
• One in ten homes in the city is now vacant.
• Marions Story

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Foreclosures Speculation

• Rentals
• San Francisco- the monthly cost of renting an
  apartment is 45 of the monthly cost of buying a
  home
• In Washington, D.C.- rental costs are now just
  59 of the cost of owning
• In Miami- rental costs are 63 of the cost of
  homeownership,

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Effects on Economy

• Job Loss
• Less consumer spending
• Weaker stock market/wall street

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Hardest Hit

• GMAC
• Citigroup Inc.
• Merrill Lynch
• Other Companies
• - Home Depot
• - Lowes

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Sinking US Dollar

• Increased borrowing
• Higher cost of goods
• Less purchasing power
• Less Demand for

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Reactions
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Global Economy

• Effects were seen in
• - Japan
• - China
• - Britain
• - Italy
• - Spain
• - Germany
• - Canada