Best Answer: Subprime borrowers are people who have a high risk of defaulting on their loans, e.g. people with checkered employment careers, people who have not help employment for long, people who have low incomes, etc.
In this particular event, most of the problem is coming from loans made to people who can not afford to make the full repayment onthe loans.
In the USA, lenders have a system where people can start loans on low interest rates, a honeymoon period, then after something like two years, the rate goes up to a normal rate.
Now a lot of sub-prime borrowers were signed up to these loans. In many cases, the people did not understand the honey moon period, or some claim they were lied to about the rates.
What also happened, was the the people/companies making these sub-prime loans, then sold the loan to other investors, such as banks, building societies, local government bodies, superannation funds, large investors, etc.
At this point you should be rolling on the floor in laughter. The people/companies buying (taking over) these loans should have know better. They can not be considered fnctionally illiterate like some of the un/under educated people who took out the loans.
However, there was a surplus of money wanting to be invested, so people/companies started to make high risk investments.
This surplus of money lead to a growth in sub-prime loans, as often that was the only area available to soak up the available funds.
Also, a lot of this money was from sources from outside the USA.
So people on sub-prime loans have now moved off the honeymoon perid and are now findng that there loan payments have gone up extra-ordinary amounts. Yep, investors greed. The other feature of the loan was that there
was no capped interest rate rise.
Naturally, many of these people are now defaulting on their loans, so their property needs to be sold for the lender to recover their money.
At the same time, home spec building by builders had been booming. spec building is where a builder buys a plot, builds a house and then sells it at the end to a home buyer. This is how many builders work.
Also, basic jobs like manufacturing work and all the associated industries are now being out competed from goods from China, so may people are now out of work and can not afford their loan repayments or need to sell up and relocate to find work.
The results is that there is a glut of houses for sale in the USA and house prices have plummetted. it is estimated that it could be seven years before they return to current levels.
There is approoximately another two years of honey moon rates on sub-prime loans, so this largenumber of defaults is going to continue.
This affects Australia as the supply of cheap money for banks, building societies and other lenders to boroow and lendout to people who want to buy houses, invest in business, or other stuff has now dried up.
Consequently, they have to pay more for the money they borrow, so our interest rate have gone up.
Some of the interest rate rises are also due to Australians spending and spending and spending, rather than putting money from these goods times (for some people) into the bank.
So our Reserve Bank has put interest rates up. Yep, this RBA interest is the agreed rate that banks, etc borrow money at.
Not a short simple explanation. It is a bit of a house of cards effect.