sumayo.......I'm no expert here, but this my understanding......
I did read from a poster who had a friend in the US and had a subprime loan....it went something like this....it seems that when borrowing higher than 80% of the property value you have a review or refinance period in say two years....when the good times are rolling on your property say has increased 20% in that two year period and you can convert your loan back into a prime loan cause your property/loan is back to 80% and all the banks would be chasing your business!....now property has been on the reverse in the states so when your review period comes its difficult to refinance because your home is worth less than the loan - top up equity (which you didn't have in the first place) or sell into the most crowded home for sales period for 15 years
plus there seems to have been a whole lot of lending to people who simply couldn't afford it ...honeymoon interest rates and all that
We don't seem to have this problem in Aus in that if you borrow more than 80% banks insist you take out outrageous mortgage insurance to cover any potential exposure at the pointy end of the valuation above 80% - also when you get a normal loan say 25 years its not reviewed in two years (to check equity levels or house prices) only if you fall behind with repayments etc...lose your job lose your home ...it happens but probably rarer when economy is doing well etc
Now the subprime lending (at current levels) is a recent thing ie there has been traditional subprime lending at low levels but its got out of hand over the last 4 years going from 100b to 300b to 500b , 1500b last 4 years but 1b in the last two....so the real wave of refinancing has yet to come ......someone did post the escalating forced home sales quartley numbers the other day - going up bigtime.....and because subprime is now under the microscope noone is going to be putting their hand up to refinance expiring subprime loans
Other posters might help here, but I would understand that primary lenders like the banks would lend a front end lending institution probably 60-80% of home values. They would source the rest (more expensively) with mezzanine finance from merchant banks and the like for 10-15% and the balance at the pointy end would come from investors
now the worst case scenario is a forced property sale where (with property already down) you might be looking at say 50% of the original loan value - this would wipe out the investors and any mezzanine finance and expose the the banks to some degree
The cost of finance to front lend lenders has also gone up dramatically which will in turn be forced to pass it on to house owners....who again can least afford it
All in all it seems to me that the losses are still working there way through the system...for the banks at least....most of the news seems to be the "front end" institutions so far...ones that have filed for protection, gone bust and the like...there have been some recent broker profit down grades in the US...the banks will be the least exposed but still exposed...the front end needs to go through the liquidation process before exact banking losses are known but they will need to increase their provisions for those losses now....whens the next reporting season for US banks?
with 1500b on the line, this is going to have to be managed carefully on the way down which seems to be well under way...going cold turkey there could be huge losses
I did see a german bank take a 2.5b euro hit, about 3 weeks ago, but they used up a general provision on their balance sheet so it didn't hit their P&L....so that, no doubt will be the banks first preference
(20min delay)