What is subprime mortgage?,Why is there subprime mortgage?,How has subprime mortgage led to crisis?

What is subprime mortgage?
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What is subprime mortgage?
Subprime mortgage is mortgage package that is devoted to low-income people in America. Those are people who have bad credit rating, such as the Delinquent credit card and motor vehicles bills.

Why is there subprime mortgage?
We are talking the law of demand and supply here. People are 'poor' in America as well as ordinary people, have a dream to own their own home, while conventional banks, many are afraid to see their credit record of accomplishment. On the other hand, mortgage companies see them as a business opportunity that needs to address. Finally, mortgage companies come with cash, and then offer home loans to them.

How dose Housing Credit Company work?
Mortgage companies were partly funded by a loan obtained from third parties, which returns in short time (1-5 years). Meanwhile, subprime mortgage itself is a long-term loan that can range from 10-20 years. In short, there are financing mismatch here.
Furthermore, mortgage companies also do business using a sales margin of mortgage-backed securities (MBS). All are collection of credits, which then ownership are sold to investors. In relation to the MBS from subprime mortgages, investors have proof of ownership in the form of shares that backed-up by the insured property in the subprime mortgage. Because MBS from subprime mortgage is quite risky, the MBS return is also high. MBS return is obtained from the installment payments by the lender of subprime mortgages, which mentioned earlier. Anyway, this MBS in the U.S. and Australia, there are separate markets. Therefore, there are buyers, sellers and the price mechanism itself. Furthermore, because the subprime mortgage is characterized by high-risk high- return, then quite a lot of hedge fund investors and investment banks are interested. Hedge Fund itself consists of funds of giant investors. Those investors have investment across countries and tend to act speculative.

How has subprime mortgage led to crisis?
Since the subprime mortgage lenders are those mediocre earnings, the ability of mortgage payment is also very weak, so when the debitors are not able to pay the mortgage loan, the MBS derived from subprime mortgages are also collapsed. Its selling value is corrected. Automatically, the investors who invest in the MBS subprime mortgage, are also suffered a loss. Worse yet, many mortgage companies went bankrupt as well, because there is no money going round and exacerbated by this mismatch financing.

How has subprime mortgage hit the New York Stock Exchange?
The market is very sensitive to bad news. And the bad news that triggered the crisis on Wall Street, when BNP Paribas, one of the largest banks in Europe from France and a German bank (IKB Deutsche Industriebank) experienced problems with subprime mortgage investments in America . Furthermore, news of the decline in subprime mortgage started unfolding, in which the estimated losses alone were about $ 35 trillion. As a result, panic started to hit the investors in New York trading floor. Investors then began to sell stocks that move in the property industry. Because the company relating to the property in the New York Stock Exchange is about 1/3 of the total market capitalization, not surprisingly, all of the stock market are also corrected. Investors, who panic, then began to think to look for alternative means of safe investment, among others via the deposits in banks and investments in government bonds.

How has the subprime mortgage crisis become a global crisis?
That capital flows borderless, making the world's financial markets become interconnected and mutual dependence of one another. Negative sentiment and panic from Wall Street, that in fact the biggest stock market in the world, quickly spread everywhere. Investors joined a global giant in hedge funds or investment banks by chance, either which has investments in subprime mortgage or not, began to withdraw cash from capital markets and begin to put it into lower risk investments. Approximately the same motives, trying to avoid the risk of larger losses (cut loss). So, no wonder the stock exchanges of regional and world are also falling.

Is the subprime mortgage crisis threatening banks, too?
For banks that have investments in subprime mortgage directly (such as BNP Paribas above), they must get the effects, namely the investment losses. Investment losses resulted in lack of reserve funds by these banks. Because of financial traffic so fast in the bank, lack of reserve funds may affect the liquidity difficulties. Moreover, what about other banks? As investors began moving their investment to a more secure place (among others to the bank deposits), then the banks accepted the 'hot money' from investors. Therefore, banks must get ready to add reserves in case if there is a sudden withdrawal of these investors. This makes banks tend to raise the interbank lending rates. Among banks to borrow loans become more expensive. This once again reflects the liquidity problems in the banking world. No wonder in recent days at the European Central Bank, the United States and Australia are busy pumping liquidity credits to prop up a smooth flow of traffic in the area of their finances.