US Dollar hits a new low!

July 14, 2007 by reyna10 · 5 Comments
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Kasalanan nang subprime mortgages

CREDIT RATING

Well, let’s start our discussion with credit ratings. Here in the US, there are three major credit rating agencies - Experian, Trans-union at Equifax. So, when you apply for credit, companies look into your credit report and check your credit ratings. Yong ratings mo is directly affecting the interest rate na ibibigay seyo. (If you want to know the nitty-gritty details on how the credit ratings works, visit Howstuffworks and here’s the link: How Credit Scores Work). To make the whole explanation simple, eto, tingnan nyo mga anak, dali-dali lang nito:

Por ejemplo: if your credit score eh malaki, dyutay gyud ug interest rate nga gibayad nimo. Ganun lang yon. Kita nyo pie chart? So, meaning, pag bagsak ang credit rating nyo like my credit rating, eh di the biggest interest ang kargada mo. Simple di ba? What’s my credit rating? Wala na ako sa chart. Negative 200 na lang siguro. So, that’s the basic principle that you have to understand before we could discuss what in the freakin’ world is subprime.

US HOUSING BOOM

Nah, am not talking about Madonna’s song A-boom-boom-boom! Sa totoo lang noh? Gwapo si Richie na bi-noom sya, diba? That’s not it. The “it” was that, sometime between 2000 yata to 2005, there was this US housing boom. Matilda, di sya bomba. What it means is that, people were buying houses like insane - why? Everything were simple not only affordable, personal incomes were rising but more importantly they have very very lax lending policies! Kung sino sino lang pinapautang!

For the more intellectual kinds who reads my blog, this is the official boom boom definition:

According to FDIC (Federal Deposit Insurance Corporation): In order to examine the historical evidence of home price booms and busts, we first need to arrive at some definition of a “boom.” Although there are many possible ways to approach this issue, we chose a fairly simple definition based on a cursory examination of cities that have exhibited some of the strongest home price cycles in recent decades. We define a “boom” simply as a 30 percent or greater increase in inflation-adjusted (or real) home prices during any three-year period. For our “1/3 in 3″ rule, we adjust the nominal home price series that is published by OFHEO using the Bureau of Labor Statistics consumer price index (CPI) less the price of shelter, which is used by OFHEO to adjust home price changes for inflation.

Ano raw?! A ewan. Basta yun ang sabi sa telegrama.

So yun na nga yun, U.S. home prices have boomed in those years. Average U.S. home prices rose 13 percent in the year ending September 2004, and were up almost 50 percent over five years. In December 2004, the Office of Federal Housing Enterprise Oversight (OFHEO) noted, “The growth in home prices over the past year surpasses any increase in 25 years.”2 Because of this rapid growth, some have become concerned about the possibility of a home price collapse, either nationwide or in a number of major cities.

LENDING TRALALA

So what happened was, nag-sulputan ang mga fly-by-night na mga mortgage companies and it was exacerbated by the exploding internet at that time such that it was a lot more easier to borrow money to buy a house. Ang ginawa nang mga gagong mortgage companies na mga to, they looked at the sub-prime market, sino sila? They are the customers na mababa ang mga credit ratings: read: na di dapat pautangin because they can’t pay or they will have difficulty paying.

So, in order to cash in on the exploding housing market, what they would do is charge these sub-prime customers fees at kung ano anong kademonyohang fees to get approved for a loan. They even invented the product “reverse mortgage”. Then, dadalihin ka nang - oh you’ll only be paying a 4% ARM interest and after the 3 years, you can apply for a second mortgage and then you’ll be fine”. Ganun ang mga drama nang mga jaeyup na to. And there were a lot of us na naloko nang mga gagong to! (he he he! kasama pala ako!). So, they’re not only raking in a lot of money of fees, they’re also raking in a lot of money on additional closing costs at the usual interest.

TOTOO TO! Maniwala ka! Toh oh! Basahin mo!

Teka. Mali. Wag ka nang magalit. Eto o. Tama ba? Nawala ko link. Hanapin ko uli. Wag kang magalit. Pero totoo talaga sinasabi ko. Peks man.

LENDING CONTINUED

So the lending continued. Yong iba, nag debt consolidation (aray ko!) at isinalpak sa mortgage. Yong iba, bumili nang Murano at isinalpak sa mortgage, he he he! Yong iba, bumili nang bagong kusina, nag-hardwood floors, bumili nang pagkalaki-laki kamong Sony TV at isinalpak sa mortgage. Pinalitan yong BMW 3-series nang 6-series. Yong iba, kinon-solidate yong credit cards sa mortgage taz, nangutang nang nangutang uli. Yong iba, nag Yoropa, pumunta sa Pinas at walang pigil ang pag-mamayabang. Meanwhile, yong personal incomes did not improve, tumaas nang tumaas lahat nang presyo pati gasolina to the point na nagkabaliblikwa finances nang mga kano at kanong pinoy, kaya ayan, sub-prime woes. Most can no longer pay their mortgages, kaya mega file nang bankcruptcies.

So, because of delinquencies and defaults by borrowers, and an ever-increasing bankcruptcy filing, nagkaron tuloy nang pullback in subprime lending. Tuloy di ako makabili nang bahay. In addition, banking regulators are proposing tougher lending standards and regulations in the subprime sector na dapat lang no?

INVESTORS ARE SCARED

You see, to kasing mga sub-prime mortgages na to, what they did is that, they packaged these at binenta sa mga investment houses. Sila ngayon ang kumukolekta nang mga principal and interest payments. So, me mga investors din sila. Now, if you don’t get any principal payments no more dahil bangkarote na yong bumili nang Murano, what are you going to pay your investors in turn? Eh di wala. Ayun. Ferris Wheel lang yon.