Online Stock Trading | Subprime, is disaster still looming?

Subprime, is disaster still looming?


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I read an interesting post in the IBD forums.  This one is from donkeypox:

Subprime buyer buying using 100% financing in 2004:
Price of house = $500,000
1st TD = 80% = $400,000
2nd TD = 20% = $100,000
House goes to $550,000 in value in 2005.  Lenders offer a 3rd TD for $50,000 letting the buyer take out the appreciated equity.
2006 house value goes back to $500,000.  2007, house value goes down to $400,000.  The only loan that is worth anything is the 1st TD.  There is no longer any asset value backing the 2nd and 3rd TD’s.

What does this mean?  Nothing too bad at the moment.  What will be the catch is if any of these loans are adjustable 3 years after initial loan is taken out and they can not resell for 550k.  The disaster comes when people begin to foreclose and try to sell properties.  We could be erasing gains seen in ‘05 and possibly ‘04. 

If the economy stays on track, given the yield curve it looks to be ok we won’t see that bad of impact as people will still have their jobs.  At any rate, since housing isn’t as liquid as stocks we’ll see a decline that will happen much more slowly.  It could be a few years of recovery after the initial decline.

A more concern of mine is the rate of foreclosures and what it will do to the consumer’s credit scores.  Their access to credit will be diminished as well their ability to spend on goods and services.  Will it happen?  Time will tell.

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