The subprime mortgage crisis is an ongoing economic problem manifesting itself through liquidity issues in the banking system owing to foreclosures which accelerated in the United States in late 2006 and triggered a global financial crisis during 2007 and 2008. The crisis began with the bursting of the US housing bubble and high default rates on "subprime" and other adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income or lesser credit history than "prime" borrowers. Loan incentives and a long-term trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favorable terms later. However, once housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as ARM interest rates reset higher. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006. As of December 22, 2007, The Economist estimated subprime defaults would reach a level between U.S. $200–300 billion.

The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments. Major banks and other financial institutions around the world have reported losses of approximately U.S. $240 billion as of April 18, 2008 as cited below. Owing to a form of financial engineering called securitization, many mortgage lenders had passed the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Corporate, individual and institutional investors holding MBS or CDO faced significant losses, as the value of the underlying mortgage assets declined. Stock markets in many countries declined significantly.

The widespread dispersion of credit risk and the unclear effect on financial institutions caused lenders to reduce lending activity or to make loans at higher interest rates. Similarly, the ability of corporations to obtain funds through the issuance of commercial paper was affected. This aspect of the crisis is consistent with a credit crunch. The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage the lending of funds to worthy borrowers and to re-invigorate the commercial paper markets.

The subprime crisis also places downward pressure on economic growth, because fewer or more expensive loans decrease investment by businesses and consumer spending, which drive the economy. A separate but related dynamic is the downturn in the housing market, where a surplus inventory of homes has resulted in a significant decline in new home construction and housing prices in many areas. This also places downward pressure on growth. With interest rates on a large number of subprime and other ARM due to adjust upward during the 2008 period, U.S. legislators and the U.S. Treasury Department are taking action. A systematic program to limit or defer interest rate adjustments was implemented to reduce the effect. In addition, lenders and borrowers facing defaults have been encouraged to cooperate to enable borrowers to stay in their homes. The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal reserve to cut interest rates and the economic stimulus package signed by President George W. Bush on February 13, 2008. Both actions are designed to stimulate economic growth and inspire confidence in the financial markets.
Source: Wilkipedia

Subprime Mortgage Woes

Line of Credit

A line of credit is an agreement by a commercial bank or vendor,other financial institution to extends a specified amount of unsecured credit for a certain time to a specified borrower. It is a good alternative when you're unsure how much you need, or when you'll need it.You can use or spend up to your pre-assigned credit limit.

A loan on the other hand, is good when you know exactly how much money you need.You borrow a certain amount of money at a fixed interest rate for a specified length of time.The fixed monthly payments include all the interest charges and fees, and reduce the amount of the loan until it is fully paid.

Credit can assist you to pay for expenses such as a home, car, college education or even a holiday abroad, but it's also convenient for smaller purchases. Used wisely, credit can help you manage your finances, and can be especially useful for emergencies.

The type of credit you choose may depend on a combination of what you need the credit for, how much you want to borrow, which type of credit offers the best interest rate, and your collateral (property or funds you can pledge to secure the debt).


PERSONAL LINE OF CREDIT

Personal Line of Credit is a line of credit extended to a client similar to a credit card. You can access your credit line by writing cheques or by transferring balances into your personal bank account.
Borrow only the funds you need or use the credit without having to reapply during the term of the line of credit.

Usually, when one is accorded this form of credit, it is used for life and whenever required.This personal line of credit is a convenient source of funds.Your personal Line of Credit is based on your credit reputation and history - not on collateral. Some of the Banks personal Line of Credit has a low interest rate and no annual fee or first year annual fee waived.

HOME EQUITY LINE OF CREDIT


Home equity loan vs Home equity line of credit
The equity in your home may be used as a collateral for you, as a homeowner, to obtain a loan. The equity consists of whatever funds you have invested in your property in order to own it or improve it.

As your property is pledged as a collateral, a home equity loan is a secured debt. If at anytime,you default on the payment of your loan,your property could be sold off by the lender and the money you owed would be recovered.

A home equity loan can be obtained in the form of a lump sum or used as a revolving home equity line of credit.A home equity loan can be either of the following:

A fixed rate mortgage
An adjustable rate mortgage
A homeowner who requires more money in large amounts usually applies for a home equity loan. Some expenses that make a home equity loan useful are :

Debt consolidation
Home repairs
Medical bills
College tuition for family members