The subprime market is hitting the final stages for a while as the Wall Street financiers are cutting off access to capital and placing expensive restrictions and contingencies when they lend at all. Wall Street is a brutal place where your best friend will also cut your heart out in a second if there is enough in it for them, but it also is the engine of capitalism.
These folks are there to do one thing, make money. And they do it well. Wall Street created a lucrative income stream while interest rates were low by created securitized mortgages and lending to those willing to pay a higher interest rate. The additional income from the brokerage of subprime mortgages hit 2.3 Billion last year.
Now that interest rates are up and the risk is also increased, these investments do not make sense for Wall Street to participate in and we are seeing the market shut down. When seen from a Wall Street perspective, the whole subprime market meltdown makes logical sense.
For those trapped in the reprecussions of it the lesson is brutal.
By extending generous credit to subprime lenders, Wall Street firms financed the borrowing binge that helped fuel the housing boom. Those firms now are turning off the money spigot. They see more borrowers having trouble paying off those mortgages in a slowing economy, which has made investors less willing to pour money into the sector.
More than two dozen subprime mortgage lenders have closed shop, and there is concern that the defaults could spread to other types of risky loans and to less-risky mortgages, exacerbating the housing market’s slowdown and possibly weighing on the economy. Accredited Home Lenders Holding Co., a subprime lender, recently was forced to sell $2.7 billion of loans at a big discount to meet lenders’ demands for more collateral.
Worries about defaults in slightly less-risky mortgages also have hit shares of companies that specialize in them, including Impac Mortgage Holdings Inc., where loans with overdue payments more than doubled last year, and IndyMac Bancorp Inc.
Subprime lenders sell many of their loans to Wall Street banks, which package them into securities to be sold to bond investors. The appetite for these bonds grew when interest rates were falling and investors wanted high-yield alternatives. The riskier the customer, the higher the interest rate, so subprime bonds were in demand. via RealEstateJournal
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