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LuckyOne

What Is The Difference Between .......

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With apologies for using US centric nomenclature, I have been pondering the labels applied to borrowers across the credit worthiness specturm when it comes to renting a house from a bank. I am beginning to think that there are two types of borrowers :

- Sub prime borrowers are those who are unlikely to be able to service their debts for more than a year or two in a situation where it is improbable that they will be able to repay the principal of their loan.

- Prime borrowers are those who are likely to be able to service their debts in the medium term provided that their circumstances don't change and will probably be able to repay the principal of their loan provided that house prices do not fall.

This is really just a ponzi scheme that will come crashing down if house prices fall after the current bull trap. I cannot see how prices can continue to rise in the next few years.

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With apologies for using US centric nomenclature, I have been pondering the labels applied to borrowers across the credit worthiness specturm when it comes to renting a house from a bank. I am beginning to think that there are two types of borrowers :

- Sub prime borrowers are those who are unlikely to be able to service their debts for more than a year or two in a situation where it is improbable that they will be able to repay the principal of their loan.

- Prime borrowers are those who are likely to be able to service their debts in the medium term provided that their circumstances don't change and will probably be able to repay the principal of their loan provided that house prices do not fall.

This is really just a ponzi scheme that will come crashing down if house prices fall after the current bull trap. I cannot see how prices can continue to rise in the next few years.

By jove after over 2000 posts, I think you've got it...!

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People refer to sub prime loans in the US because they believe the structure of the product is as important as the borrower type or security.

EDIT: Oh and it is all defined at the outset of the loan. So if you lose your job you cannot pay but you might not be sub-prime.

So..what are you saying?

Peeps are easily confused....or just plain stupid?

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- Sub prime borrowers are those who are unlikely to be able to service their debts for more than a year or two in a situation where it is improbable that they will be able to repay the principal of their loan.

- Prime borrowers are those who are likely to be able to service their debts in the medium term provided that their circumstances don't change and will probably be able to repay the principal of their loan provided that house prices do not fall.

I think that is nearly there although not quite right.

Sub-prime borrowers are sub-prime because the risk of them defaulting and the bank not recovering 100% of the loan is higher. That doesn't mean they are ALL likely to default after 1-2 years, it just means that more of them are likely to.

And what happens to house prices does not affect someone's ability to pay back a loan. However, it does affect the bank's recovery in the event of default, which one reason why having a high LTV might make someone more likely to be sub-prime.

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subprime is a mutual agreement and understanding that the borrower cant afford the mortgage the moment they signed the contract.

basically the application process goes along the lines of...

can you afford a normal mortgage?

no.

ok, now what if i charge you 2% more than a normal mortgage. can you afford it now?

no.

sign on the dotted line please.

cheers thanks.

Edited by mfp123

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The truth would be that there are numerous levels from those loans that could not be paid from day one to loans that would be paid in just about every eventuality. There is a big grey area.

These terms are used to generally group loans, with many sub-prime in hindsight being less likely to default than many so called prime as the critera was set up in a totally different economic reality.

From a bankers point of view it is ideal as he can sell to everyone with the same risk. It is, on paper, better during an economic growth period to have more sub-prime lending as the return are so much greater and thus profitable.

Note

risk is profit/likely default or loss

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With apologies for using US centric nomenclature, I have been pondering the labels applied to borrowers across the credit worthiness specturm when it comes to renting a house from a bank. I am beginning to think that there are two types of borrowers :

- Sub prime borrowers are those who are unlikely to be able to service their debts for more than a year or two in a situation where it is improbable that they will be able to repay the principal of their loan.

- Prime borrowers are those who are likely to be able to service their debts in the medium term provided that their circumstances don't change and will probably be able to repay the principal of their loan provided that house prices do not fall.

This is really just a ponzi scheme that will come crashing down if house prices fall after the current bull trap. I cannot see how prices can continue to rise in the next few years.

From a recent video, things aren't even as simple as that. Prime borrowers are likely to be dual income. Fine and dandy in growth sceanrios. But during a decline, dual income is twice the risk to a lender.

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