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subprime～

1.First, let's understand what is subprime. It is another mortgage category as opposed to prime. What if a family doesn't have enough income to afford a house? What if a family has a poor credit history so that they can borrow much to buy a house? They fall in the subprime section (the good family with plenty income and good credit history are in prime section). Banks loan their money to families in subprime but at a higher rate than prime rate. Therefore, subprime is a risker business.

2. The creation of ARM (adjustable rate mortages). There many many types of ARM, 2 year ARM, 3 year ARM, and 7 year ARM. Normally, people takes our loans using 30 year or 15 year fixed rate. But ARM provides lower rate only for a period time, 2 year or 7 years. After that it is adjustable based on market conditions.

3. Back to 2000-2003, due to dotcom bust, the Fed reduced interested aggressively to 1%(?). The mortgage rate is the lowest in years. Many subprime loans were taken using ARM (this is the only way they can afford a house). Things changed dramatically in 2007 when the Fed had been increasing the interest rate and it happens that many of their ARM expired and suddenly exposed them to a much higher rate. Most of them can't afford it.

4. Wall street had packaged these subprime loans as a security and been selling them to others. When more and more family can't afford to pay the monthly payment, it blowed.

That is the basic reasons for subprime crisis.

how to manage it?

1. tightening the load standards for subprime section;
2. eliminating ARM for subprime section;
3. strengthening Government's monioring mechanism. (I don't think wall street did anything. Their actions were all business decisions. They suffered from their decisions. I do think Fannie Mae and Fredmac went too far).

The consequence is that a lot of fewer family can afford a house in the US...

阿妞，你们考这个干啥？这个对中国不适用，我担保你们老师也不明就里。

随便说一些，剩下的阿米狗补充吧。

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