Sunday, July 29, 2007

Investment Bubble 1 - Sub Prime Lending

Major Stock Markets across the world tumble recently. The market is looking for a chance for correction after 3 months of continual risings. The main culprit this time is the Sub Prime Lending issue in the US. What is actually this sub prime lending issue about?

What is Sub Prime Lending?
it is loans to people who have patchy credit histories or cannot prove their incomes.
The loans carry a higher rate of interest to compensate for increased credit risk.
This include Sub Prime Mortgages which these people borrow based on higher interest rate.

So whats the problem?
Many Sub Prime Lenders in USA have been hit by a rise in default rates, meaning fewer of their customers have been able to keep up with mortgage and loan repayments.
A slowdown in the US housing market coupled with rising US interest rates have also hit this sector.

What will be the repercussion?
Such defaults sent mixed signals to the economy. On one hand, it seems growing, on the other, many people are not able to pay their loans. Financial institutes may go bust, many people may become homeless and many housing jobs will be lost. This sector may go into a slump and many jobs lost. When jobs lost, economy may tumble.

What I feel?
This is a time bomb in the US. The default rates may not peaked yet. More may come later but many prefer not to see it as a major problem.
The world market will continue to rise after this correction. For longer term, it will depends how the Asian Economies grow and the political climate of the oil nations.

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