What is subprime meltdown?

It is said that the disintegration of subprime occurs when a large number of mortgage debtors qualified for loans, although the debts ended with a bad credit score. In addition to influencing creditors, such melting also has an impact on investors, because in many cases these loans are packed and sold as debt tools on the investment market. Homeowners who fail on debts usually lose their homes, because the laws in most nations allow creditors to exclude when debtors cannot honor their obligations to repay secure loans.

In many countries, rating agencies collect information on the financial strength and habits of individuals and entities. These companies use this information to create credit ensembles and creditors can receive copies of these messages before credit expansion people or companies. Usually credit agencies assign scores to debtors and in most cases people who seem to be most likely to repay their debts Prime Údiské scores,While people with a bad history of debt management receive low scores that are sometimes referred to as subprime. During the period of recession, people with different credit scores often end in failure on their debts, but Subprime melting is an event that largely includes debtors with poor credit.

Some investment companies sell bonds or mortgages based on mortgages that are bound to investment funds that contain thousands of loans on subprime. Interest payments made on basic loans are handed over to shareholders in the form of dividend payments. People with poor loan are considered to be high -risk debtors, and therefore these individuals are obliged to pay above average interest rates on loans. As a result, investors are often attracted by these securities because the returns are much larger than the more conservative types of investment. During the melting of subprime investors overThey will be receiving dividend payments if most basic loans go to the starting state and in many cases the share of funds will eventually become worthless.

attempt to minimize risk, some banks sell subprime loans to investment companies; However, many banks are indirectly at risk of failure, as banks often sell swaps for failure to other companies and these swaps work similarly to insurance contracts. If the entity that the bank secures fails on its debt obligations must be carried out by the bank that issued a swap to the creditor of this company. During the economic boom, banks generate a significant amount of income through the sale of swaps. When subprime breaks up, many banks lose a huge amount of money as they have to pay paydays when other companies holding a subprime loan get into financial problems.

Banks that encounter financial difficulties must limit lending, and this means that businesses cannot get the necessary FINuNCing to add new jobs or expand operations. In addition, many companies reduce expenditures due to lack of opportunities for financing, leading to job losses. The melting of subprime can eventually contribute to the great economic crisis.