1. Sub-prime Mortgage

2. How do banks make money? Deposits Loans Interest Investment

3. How can we borrow money? The Regular Procedures Applying for a loan via Banks/ mortgage companies Assessing individual value and credit Calculating the affordable monthly payment Deciding the interest rate and loan amount Putting in down payment Signing the mortgage contract with terms Banks transfer the loan to pay for the houses. Borrowers start paying mortgage payment.

4. What is foreclosure? I bought a house of $300,000, and I took a 30 year loan at an annual interest rate of 7.5%. I have loyally paid my mortgage payments for the past 25 years. Now I am broke. I don’t have money to pay my mortgage bills any more. My bank sent me a foreclosure notice. I’ll lose all my past payments and my house.

5. Problems at the start A dream of home comes true! Banks encourage people to buy homes. If you cannot afford it, the banks will help you. It’s a good opportunity to make a fortune via investment. Within a few years, maybe you’ll get promotion and become capable of paying the house mortgage. Or your house value will increase and you can sell it to make a fortune. When banks compete, you win. To compete, the banks will not follow regular procedures to process loan applications. If people cannot afford the payment, the bank will take over the houses and put out for auctions.

6. Sub-Prime When you follow the regular procedures to get the loan approved, you are a prime customer. When you cannot afford the loan but the bank approved your loan application without following the regular procedures, you are a sub-prime customer.

7. Mortgage Problems The housing market was over-heated and the prices were unreasonably high. Too many sub-prime mortgage loans were set up. It’s highly risky for the banks. When the economy showed a weakening sign, the housing prices dropped.

8. Should I keep my house? I just bought a house for $500,000 two months ago. I got a sub-prime mortgage. I borrowed $495,000 for 30 years with the annual interest rate of 7.85%. Now the house value dropped down to $395,000. I don’t want to keep the house because I am losing money with it. I’ll stop mortgage payment and let the bank take it as foreclosure.

9. What happens to the banks? The banks will take back most of the houses as the foreclosures. It takes time and money to deal with the foreclosure houses. These houses lost value and could not even get a good deal at auctions. The banks lost money. The banks were short of money for circulation. Many banks went bankrupt. The investment banks were seriously affected. It became serious financial crisis across the world because the investment banking is involved.