Subprime mortgages fueled today's economic crisis

by Katherine Mejia

Subprime Mortgage lending is a major part of the reason why the American economy is in such turmoil today. This crisis has been coming for a long time, maybe because of new laws that were passed when new presidents came in, or maybe the crisis is at the hands of the lenders. People took advantage of the incredibly low interest rates and borrowed money for homes they could not afford. But it might have been the fact that lenders did not worry or care about the effects that this might have on the economy in the future.

We know now that it is too late to prevent the negative effects of subprime mortgage lending. Now it is up to us to get out of this crisis. Many obstacles lie ahead and the economy will eventuall turn around. The time it takes to turn around completely depends on us. A new president or bailouts will not alleviate the situation all on their own. It is up to the average American to learn from this crisis so that in the future such a predicament can be prevented.

There were many early warning signs that this would happen. Those who spoke about it were listened to but were not paid as much attention as they are now that were are waist deep in debt and there is no way to run away from this crisis. As early as 2004 many professionals were warning subprime lenders that in a not so distant future, borrowers were going to default on their loans. The fact that Fannie Mae and Freddie Mac, who were the biggest lenders until they were taken over by the treasury, were handing out loans to people with insufficient credit fueled this crisis as well as where the money was coming from. Both lenders were lending money with borrowed money creating a massive amount of debt that caused some of the biggest names in finance ( Lehman Brothers, Bear Sterns) to come crumbling down.


But it is not the lenders who will suffer the most from what has happened. It is the borrowers who are losing their homes all around the country the ones that are paying the consequences. Tax payers are also paying the consequences unfairly. While wall street calls itself the “biggest loser” it is a system that will recuperate when investors feel safe enough to take risks. But the average citizen is left hanging paying for bailouts and becoming homeless because of the situation they were put in due to greed and irresponsibility.

Sources:
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html

http://money.cnn.com/2007/08/10/markets/subprime_losers/index.htm

http://topics.nytimes.com/topics/reference/timestopics/subjects/m/mortgages/index.html

Credit Scores: What You Need to Know

Posted by: Andrew Moran

Many of us use credit cards on a daily basis as a means of convenience in order to purchase the goods we need without carrying large amounts of cash on-hand. In order to be approved for a credit card, or any other type of loan, consideration must first be given to the individuals credit score. A credit score is also known as a FICO score, moreover, it is the score derived from the Fair Isaac Corporation. The credit score that they develop ranges from 300-850, and takes all types of credit, mortgages, and loans into account. 30% is determined by your payment history; 30% is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you; 15% is based on the length of your credit history, how long you have had accounts, and how long it has been since there was any activity; 10% is based on the number of accounts you have recently opened compared with the total number of accounts you have; finally, 10% is determined by the types of credit you have used.

This FICO score can have significant implications regarding future home loans, auto loans, college loans, etc. In order to receive the best loans with the best rates a score of 700 or better is generally needed. Since FICO scores are extremely volatile, it is important to make sure you avoid falling into credit traps. Five things that everyone must try and avoid are:

1. Late Payments

2. High Card Balances

3. Closing Credit Card Accounts

4. Having Too Many In-Store Credit Cards

5. Fines

Avoiding all of these things is sure to provide a consumer with a relatively good credit score. Having a good credit score is essential for obtaining future loans, and without a good FICO score, it is nearly impossible to get loans. For instance, merely applying for a home loan will make your FICO score drop an average of 5 points. The score will drop because creditors will request a copy of your credit report in order to make a decision. This inquiry goes down on your report, and will affect your FICO score for a year. In this regard, it is extremely important to manage your credit. If you wish to view your credit score, reports are available online annualcreditreport.com.

Sources:

http://money.cnn.com/2006/07/10/pf/credit_killers/index.htm

http://www.nytimes.com/2009/01/06/your-money/credit-scores/primerscores.html

http://www.washingtonpost.com/wp-dyn/content/article/2009/01/24/AR2009012400163.html