(2) - Sub-prime housing mortgage 

                                 
                             ...What is this???

Before going to discuss more the actual circumstances of the U.S. credit crisis (specifically the U.S. sub-prime housing mortgage crunch), let me start off by talking a bit about the definitions  of ‘Sub-prime housing mortgage’ terms. 

The Federal Bank and thrift Supervisory Agencies said “Sub-prime refers to the credit characteristics of individual borrowers. They characterize sub-prime borrowers as those who display, among other characteristics, (i) a previous record of delinquency, foreclosure, or bankruptcy, (ii) a low credit score, and (iii) a debt service-to-income ratio of 50 percent or greater.” (Rajdeep Sengupta and William R. Emmons, June 2007). Hancock et al. (2005) also attempted to classify sub-prime mortgages according to credit scores and loan-to-value ratios. As can be seen in the table below, if the credit score is equal to 580 (or lower) and the loan-to-value ratio is below 80% or between 80-90%, this segment is defined as sub-prime lending. As long as the ratio is more than 90% it also refers to sub-prime mortgages. (Click here for more details).

Source: Hancock, Diana; Lehnert, Andreas; Passmore, Wayne and Sherlund, Shane M. “An Analysis of the Potential Competitive Impacts of Basel II Capital Standards on U.S. Mortgage Rates and Mortgage Securitization.” Basel II White Paper No. 4, Board of Governors of the Federal Reserve System, 2005.

Sub-prime housing mortgage, which is one kind of sub-prime mortgages, saw a strong development in the early 21^st century and even became an industry in the USA (Yuliya Demyanyk and Otto Van Hemert, 2008). (Click here for more information). It means that such a kind of mortgages became a type of business with lots of profits not only for lenders (banks) but also for speculative investors. In addition, a special thing here is that most banks and credit institutions in America lending under this form accepted security by assets created from borrowed capitals. Thus, we can realize that the risk in this situation is very high as housing often falls into ice cycles. 

                                       

                                         See you in my next post...