2008 Woodie Awards
The subprime crisis may be affecting students financially
Christina Piazza
Issue date: 4/17/08 Section: News
Think the subprime crisis is just affecting Wall Street? Guess again.
Look at your financial aid package for next year, surprised?
The first round of the subprime crisis started with banks lending subprime loans and liar loans with inflated property values as collateral. However, when the real estate market started to decline, many borrowers defaulted on their loans, and banks have not been able to recoup their principal or interest.
Now, a second wave of trouble hits the economy as many borrowers are defaulting on their home equity loans (second mortgages).
According to the New York Times, "Americans owe a staggering $1.1 trillion on home equity loans - and banks are increasingly worried they may not get some of that money back."
This number is continually increasing. Fitch rating, a company that rates banks has already seen this.
According to Forbes.com. "Fitch added indications from rated banks in the past few weeks suggest that home equity delinquency rates are rising at a far more rapid pace than even most bankers' and analysts' grim outlook for 2008 had anticipated,"
The home equity loan may not be the only loan borrowers have to pay back in some cases.
According to the New York Times, many lenders advised borrowers to take out a second mortgage, as a piggy back to the first, in order to avoid putting cash down,
However, is this the right decision?
"I believe it is reckless for a borrower to take out a second loan," said Ralph Lim, associate professor of finance and economics. "Interest and principal owed become even higher. Unfortunately, borrowers may do this because they do not have sufficient cash flow to service their original debt. The situation becomes worse."
But after taking out two loans, who really owns the home- the borrower or the bank?
According to the New York Times, "The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity - the value of the properties minus the mortgages against them - has fallen below 50 percent for the first time, according to the Federal Reserve."
Look at your financial aid package for next year, surprised?
The first round of the subprime crisis started with banks lending subprime loans and liar loans with inflated property values as collateral. However, when the real estate market started to decline, many borrowers defaulted on their loans, and banks have not been able to recoup their principal or interest.
Now, a second wave of trouble hits the economy as many borrowers are defaulting on their home equity loans (second mortgages).
According to the New York Times, "Americans owe a staggering $1.1 trillion on home equity loans - and banks are increasingly worried they may not get some of that money back."
This number is continually increasing. Fitch rating, a company that rates banks has already seen this.
According to Forbes.com. "Fitch added indications from rated banks in the past few weeks suggest that home equity delinquency rates are rising at a far more rapid pace than even most bankers' and analysts' grim outlook for 2008 had anticipated,"
The home equity loan may not be the only loan borrowers have to pay back in some cases.
According to the New York Times, many lenders advised borrowers to take out a second mortgage, as a piggy back to the first, in order to avoid putting cash down,
However, is this the right decision?
"I believe it is reckless for a borrower to take out a second loan," said Ralph Lim, associate professor of finance and economics. "Interest and principal owed become even higher. Unfortunately, borrowers may do this because they do not have sufficient cash flow to service their original debt. The situation becomes worse."
But after taking out two loans, who really owns the home- the borrower or the bank?
According to the New York Times, "The result is a nation that only half-owns its homes. While homeownership climbed to record heights in recent years, home equity - the value of the properties minus the mortgages against them - has fallen below 50 percent for the first time, according to the Federal Reserve."
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