Understanding current financial times
Valbona Bushi
Issue date: 11/21/08 Section: News
I have tried to stay away from talking about the current financial crisis, because as an accounting major I definitely have my biases. However, for those of you who haven't been following it or don't understand all the lingo that goes along with it, I want to explain the situation as clear as I understand it and show you again the importance of good credit, living within your means, and saving and building wealth to be ready for anything.
The risk for this financial crisis increased with subprime lending. This means that companies started lending money out to debtors with worse credit than debtors they had financed before. While there is some risk associated with taking out loans (hence one of the reasons you are charged an interest rate), most loans are given out with the hopes of recovering the capital back.
As we have discussed earlier this year, your credit score is a grade on how good of a debtor you are. As a college student, if you have no credit history or score, you are considered higher risk to a lender, meaning that you could get charged higher interest rates if they decide to let you borrow at all. Thankfully, as we come from Case and read these articles, given our thirst for knowledge we will always be good debtors and pay back all of our debts (hopefully), but take this statistic into consideration:
The Federal Reserve Bank says that in 2004 "43 percent of U.S. families currently spend more than they earn." In 2007 the savings rate for the U.S. was at negative 1 percent, the worst in 73 years. This means that not only are Americans spending more than they are getting, but they are also dipping into their savings. With such a consumer- driven market, it can be very hard to limit your spending.
Let's go back to the subprime lending. Everyone knows of the American dream of owning a home with the white picket fence. With real estate booming, people were given the opportunity to buy homes at lower prices. Many mortgages would be easy to obtain, as they required no money down and many offered the option of paying only interest for the first several years. The mortgage payment would then triple, quadruple, or multiply even more after the first years.
Perhaps some people ignored this information and were distracted by the low payments that faced them in the beginning. Others were likely looking to make money by turning these houses around and taking advantage of the real estate boom. Whatever the reason, many of them found themselves unable to handle the ballooning payments and had to default on their loans.
This has happened ever since loans have been available, and banks can handle a certain amount of defaults, but when everyone starts to default and the real estate market starts to decline, banks are left with a business model that doesn't fit theirs: houses, instead of loans, to sell.
As I said before, this is the financial crisis from the perspective of the real estate market. You never want to be in a situation where you are living outside of your means. Keeping up with the Joneses isn't as cool if you end up in default and possible bankruptcy.
The risk for this financial crisis increased with subprime lending. This means that companies started lending money out to debtors with worse credit than debtors they had financed before. While there is some risk associated with taking out loans (hence one of the reasons you are charged an interest rate), most loans are given out with the hopes of recovering the capital back.
As we have discussed earlier this year, your credit score is a grade on how good of a debtor you are. As a college student, if you have no credit history or score, you are considered higher risk to a lender, meaning that you could get charged higher interest rates if they decide to let you borrow at all. Thankfully, as we come from Case and read these articles, given our thirst for knowledge we will always be good debtors and pay back all of our debts (hopefully), but take this statistic into consideration:
The Federal Reserve Bank says that in 2004 "43 percent of U.S. families currently spend more than they earn." In 2007 the savings rate for the U.S. was at negative 1 percent, the worst in 73 years. This means that not only are Americans spending more than they are getting, but they are also dipping into their savings. With such a consumer- driven market, it can be very hard to limit your spending.
Let's go back to the subprime lending. Everyone knows of the American dream of owning a home with the white picket fence. With real estate booming, people were given the opportunity to buy homes at lower prices. Many mortgages would be easy to obtain, as they required no money down and many offered the option of paying only interest for the first several years. The mortgage payment would then triple, quadruple, or multiply even more after the first years.
Perhaps some people ignored this information and were distracted by the low payments that faced them in the beginning. Others were likely looking to make money by turning these houses around and taking advantage of the real estate boom. Whatever the reason, many of them found themselves unable to handle the ballooning payments and had to default on their loans.
This has happened ever since loans have been available, and banks can handle a certain amount of defaults, but when everyone starts to default and the real estate market starts to decline, banks are left with a business model that doesn't fit theirs: houses, instead of loans, to sell.
As I said before, this is the financial crisis from the perspective of the real estate market. You never want to be in a situation where you are living outside of your means. Keeping up with the Joneses isn't as cool if you end up in default and possible bankruptcy.
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