What is a subprime mortgage?

"Subprime mortgage loans refer to loans provided by people with poor credit ratings who are unable to borrow from normal channels. The interest rates on subprime mortgage loans are generally higher than those on normal mortgage loans, and they can often be refinanced at any time. Floating interest rates that increase significantly over time pose greater risks to lenders. Because subprime mortgage loans have higher default rates, they also pose higher risks to lenders than normal mortgage loans.

"The subprime mortgage problem in the United States is the "culprit" that caused the current global market crash. What exactly are subprime mortgages? Will it have any impact on Hong Kong, China?

In the past decade or so, the booming housing market in the United States has created a group of owners who continue to put up mortgages on their properties and use the borrowed money to spend.

In Hong Kong, China, when banks approve property mortgages, they will control the credit limit within 70% of the property price. However, in the United States, some investment banks and hedge funds, in order to gain business, will provide mortgages at high interest rates or even zero down payment to people who are not qualified for repayment. Because these loans are of lower quality, they are considered subprime mortgages. In order to share risks, financial institutions issue loans into bonds. Due to the high returns, when the property market rises, many banks and fund managers are attracted to buy bonds, hoping to "collect both financial and interest returns."

However, as the U.S. housing market declined, problems with subprime mortgage loans began to emerge at the end of last year. Many financial institutions had to write off subprime mortgage bonds, and the bonds themselves could become waste paper at any time. The problem has recently spread to the Southern Hemisphere, with two Australian hedge funds not allowing fund holders to redeem their funds because they lost money investing in subprime mortgage bonds.

Scholars said that investments by funds and banks in Hong Kong rarely involve subprime mortgages, but if there is a downturn in U.S. real estate, the global stock market will be in crisis, and Hong Kong stocks may also be dragged down: "Because of the emergence of negative equity, Banks are forced to repossess properties, and financial institutions have to sell properties at a certain price to protect their own interests. Some subprime mortgage fund holders will also redeem their funds. The fund faces redemption pressure and can only mobilize funds overseas to save the country. Markets that are easy to cash out will definitely be considered when making allocations. In Asia, of course, this refers to Hong Kong and Singapore. "

The Investment Fund Association said that hedge funds mostly hold subprime mortgage bonds. Investors should be careful: "Some open-ended funds that allow Hong Kong retail investors to invest may not participate in the subprime mortgage market to a large extent. On the contrary, some private equity and hedge funds may participate in these markets to a greater extent." She suggested that the public should be careful when buying funds. Know the types of funds and it is best to diversify your investments. ”, Reference: Reference ***, atv news website, Zeng Yuancang’s column: Click The expansion of the storm depends on the Federal Reserve’s action 2007/8/6

The U.S. stock market has fallen sharply again, and everyone should be doubly careful. In the past two weeks, every sharp decline has been followed by a rebound, which has attracted many people to bet on the rebound. However, now that the stock market has experienced a wave of lower prices, the risk of betting on a rebound has increased. On the contrary, taking advantage of the rebound to reduce holdings will More ideal.

The problem of subprime mortgages in the United States has been expanding the scope of the crackdown. Now even some banks in the mainland are involved and hold some mortgage bonds, and these mortgages are subprime mortgages. In fact, it should be said that banks and funds all over the world will be involved to a greater or lesser extent.

This whole problem should start with mortgage bonding. Many years ago, if anyone wanted to buy a house and borrow money from a bank, the bank would carefully evaluate the background of the borrower. Did he have a regular job? How much is your monthly income? What is your repayment ability? Therefore, once the borrower is unable to repay the money, the bank will have to face the risk of bad debts.

Later, some financial institutions invented mortgage bonds. The method was to package some mortgage contract portfolios into an "asset" and then issue bonds to sell. The financial institution only needed to earn the interest rate difference. The risk is transferred entirely to the person or institution purchasing the bond. For example, if the average interest rate of this batch of mortgages is 7, the mortgages will be sold as bonds at a return of 5, earning 2 profits. After the financial institution earns a risk-free interest rate difference, it will take back the funds and lend it to another person. Some people buy houses.

Because mortgages can be sold as bonds to transfer risks, financial institutions are becoming more and more "loose" in lending money. They no longer strictly examine the credit level and repayment ability of borrowers like traditional banks. . You can borrow at will. Anyone can borrow. A credit check may be done, but it is only used to set the interest rate. Those with poor credit will have higher interest rates. Those with poor credit will pay higher interest rates. Mortgages with poor credit are so-called subprime mortgages. . Financial companies package these subprime mortgages into bonds and sell them. In fact, these bonds composed of subprime mortgages should be junk bonds. However, there will always be people in this world who think that high returns and high risks are worth trying, so there is a market for junk bonds. If 1 million bonds are sold to 1 million people, the risk shared by each person is only one millionth. However, if you buy one from financial institution A, and then buy one from B, C, D... In the end, you may hold as many as 1 million junk bonds. If there is a problem with all these bonds, the risk is not small.

The storms of the last century were very destructive

I remember that in the early 1990s, there was also a junk bond crisis in the United States. The prices of a large number of junk bonds depreciated sharply and their destructive power was also very great. The global stock market fell by more than 20%, and the government of a town in the United States called Orange went bankrupt because the town invested in a lot of junk bonds.

The only way to solve the subprime mortgage crisis is to cut interest rates and see how the Fed handles it.

The author is the director of the MBA program at City University. Reference: Zeng Yuancang’s column. Subprime mortgage loans have the characteristics of high returns and are loans provided by financial institutions to home buyers with poor credit records. Since buyers have to pay higher interest rates than ordinary loans, huge profits have prompted financial institutions to significantly increase the amount of money they invest.

In order to compete for the big pie of subprime mortgages in the US real estate market, investment banks have aggressively acquired small and medium-sized banks or mortgage companies in recent years. In 2003, HSBC Holdings acquired Household International (later renamed HSBC Capital), and Deutsche Bank acquired Mortgage IT in July last year, all out of considerations of quickly entering the US subprime mortgage market. Similar acquisitions also include the mergers of Bear Stearns, First Franklin and Encore Credit by Morgan Stanley, Merrill Lynch and Saxon Capital respectively.

From 2001 to 2005, the amount of subprime mortgage loans in the United States increased significantly year by year, reaching as much as 625 billion US dollars in 2005, which was five times larger than that in 2001.

However, since the credit of subprime mortgage borrowers is difficult to guarantee, the risk factors involved in the loans are quite high. The Federal Reserve's benchmark interest rate has been raised 17 times in a row in the past three years, and the payments required for subprime mortgages have also gradually increased. As a result, low-income borrowers are unable to pay their repayments, and some home loans have begun to turn into bad debts.

Take HSBC Holdings as an example. Its subprime mortgage customers are mainly new Mexican immigrants with no credit history. At the same time, the relevant loan approvals are also quite loose. The arrears of HSBC Holdings’ customers have been significantly trending since last year. serious.

HSBC Capital, which was renamed from the acquired Household International, is very aggressive in its operations in order to gain market share. The loan amount of HSBC Capital has reached 288 billion US dollars. At the same time, it does not focus on "absorbing deposits", with deposits of only 1470 million US dollars. billion dollars. Last year, HSBC Capital only contributed 5% of HSBC Holdings’ profits, but HSBC Holdings had to increase its provisions by US$1.8 billion from last year to next year, which is likely to wipe out nearly half of HSBC Holdings’ net profit last year.

St. Louis Federal Reserve Bank President Poole pointed out in a public speech that the number of mortgage loans lent to high-risk customers will increase. Many companies took out excessive loans without sufficient documentation to prove their ability to repay.

Both he and Dallas Reserve Bank President Fraser believe that the U.S. Federal Reserve has room to raise interest rates. Fraser said that if inflation fails to come down, he will strongly support continuing to raise interest rates. But for the time being, he is still satisfied with the outlook for inflation, especially the possibility that the inflation rate will fall back below 2%. For all of last year, U.S. inflation was 2.2%.

The Mortgage Bankers Association predicts that between US$500 billion and US$800 billion in adjustable rate mortgages will need to be reset this year. Some analysts point out that because mortgage interest rates have risen a lot from historical lows in the past two or three years, resetting interest rates at current levels will make it difficult for many homeowners to cope, leading to widespread supply cuts.

Mortgage rates will make it more difficult for borrowers

Information from the research firm Friedman Billings Ramsey Group shows that in the subprime mortgage market, those who have been in arrears with repayments for more than 90 days and those who have been The number of mortgage resumptions has reached a six-year high.

As the risk of building loans has increased significantly, financial institutions have begun to turn off water pipes for low-income borrowers. Countrywide, a mortgage company, pointed out that last month it reduced the number of loans to borrowers with poor credit records. In terms of borrowing and lending, the amount of loans dropped by US$800 million, or 21%, from US$3.74 billion in December.

Mortgage companies have also had their credit ratings lowered one after another.

Standard & Poor's downgraded New Century Financial Corp, the country's second-largest subprime mortgage services company, from BB to BB- on Friday. ,