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March 28, 2007

The Sub Prime Problem

Earlier today, Federal Reserve Chief Ben Bernanke went before a congressional panel. The biggest issue that he had to address was the sub-prime crisis that has been ravaging the market for the past couple months. Sub-prime loans are given to people with lower credit ratings. These people pay much higher interest rates than people in other segments of the borrowing industry. Due to the housing slow down, many people that were using sub-prime loans to purchase houses to flip are having trouble paying down their debts because they can't unload their properties. This inability to pay is causing an increase in default rates. Another part of the problem is that some of these sub-prime loans were initially interest only. With an interest only loan you only have to pay down interest for the first couple years; however, after that period is over your monthly payments can skyrocket several hundred percent. Those loans are now coming into that phase which is also contributing to this problem.

The question that Ben Bernanke was asked is one that has been on the minds of everyone connected to the financial markets. Will the sub-prime problem spill over into other parts of the economy? To this question, Bernanke says that the answer is likely no. He believes that it will likely be "contained". However, he also believes the situation warrants continuous monitoring.

Posted by jkill at March 28, 2007 12:04 PM


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