A Bigger Crisis Than the Sub-Prime Awaits America
Estimates also place an average US householder's debt at $ 9,700 on credit cards.
With borrowers using credit cards to repay loans, defaults on 'better' home loans will rise too. As the sub-prime home loan mess is cleaned up with a $ 700 billion bailout, there is trouble cooking elsewhere too.
Sub-prime is already old news, the venom is spreading to mid-prime and prime mortgages too. So the $ 700 billion bailout will not be enough.
Mid = prime loans have an unusual organization. For the first two years only the interest on the loan has to be paid, aater that the principal portion in, and that has started to happen now.
As the US economy enters into a recession and the principal portion to be repaid also kicking in, the mid-prime borrowers are more and more likely to be defaulters as well.
The US home loan market is estimated to be around $ 11 trillion, of which $ 1 trillion is the sub-prime market, and the mid-prime around $ 1.4 trillion
Mid-prime market is definitely bigger than the sub-prime market, and with more borrowers turning defaulters, there will be more trouble brewing, much more than the existing sub-prime.
For the uninitiated, let me stop to explain. The prime home loan market is the best part of the market in which borrowers who have good credit ratings are given home loans. Mid-prime is not a fully documented loan, and borrowers pay a slightly higher rate of interest. Sub-prime is the lowest level of the market and borrowers are mainly those with very poor credit repayment history, who would not normally be given a loan.
Borrowers are facing a financial crunch and have stared using credit cards to pay off home loans. Cash-strapped mortgagers are using their credit cards because right now, this is the only option left to them, until their cards max out.
Do you think people now get the fact that they should save, or face ruin?
Do you think people now grasp the fact that houses are risky investments , and not savings accounts or ATMs?
It's time people got in touch with reality and started thinking smart.
