SubPrime Lenders

In recent days the stock market has reacted quite negatively to problems "Subprime" lenders have been having. Subprime lenders specialize in home mortgage lending to borrowers with credit problems. The lenders have been raking in the bucks due to heavy fees and high interest rates. The loans are usually sold to someone else so that the lender can keep on making loans.

For a while the game worked. As long as housing prices were rising then if a borrower got in trouble he could sell the house, pay off the loan (and perhaps some penalty fees as well) and even pocket a little cash. However, in many markets, home prices have been stable or even falling. Now if a borrower gets in trouble and can't make payments he is stuck. If the borrower sells the house he takes a loss, especially with all the commissions and fees. These borrowers most likely can't afford a loss, they are not top notch remember, so they hang on to the house until the lender forecloses.

So the lender now has a house that is probably not worth the loan it made which eats into those profits obtained earlier. Well, this is bad for the lender and would explain why the stocks of those lenders are dropping but why stocks in general?

Well, those foreclosed houses must be sold which further depresses housing prices. Falling prices cause a drop in sales. Sellers don't want to sell when they see prices are too low. Buyers are happy to wait for lower prices in the future. Housing sales drag along a lot of other spending as well, new appliances, furniture, carpet, and stuff that people have to have to make the new house complete. Hence, stock traders are worried that these subprime problems will spread into the rest of the economy. Chances are they probably won't but stock traders are entirely focused on the future.