Saturday, August 11, 2007

US Sub Prime Crisis Scenario In The Philippines

The US is now facing a sub prime mortgage crisis which threatens borrowers with foreclosures. People who borrows from sub prime lenders are those who can not get loans the traditional way from banks due to their poor credit history. Sub prime lenders charge higher interest rates because their borrowers are deemed as high risk. This has become big business in the US and UK in the past few years with lenders giving out loans left and right. Until reality hits that interest rates are rising while house prices are falling leaving people unable to refinance as quickly. The effects of this are now being felt in the stock markets worldwide due to fears that this problem will spread beyond sub prime lenders with American Home Mortgage, the 10th largest lender in the US as the first big casualty in what others fear is just the preview of things to come.

Can such a scenario happen here in our country? Sub prime lenders here in the country are usually what we call five sixters and are usually small firms or private individuals.They will charge interest rates that will cost you an arm and a leg. But those rates are justified due to the inherent risk of lending to people with poor credit history or those who has no documents showing proof of income. The closest thing to the sub prime crisis that the Philippines has encountered was during the 1997 Asian financial crisis where many businesses and lives have been ruined due to the extreme devaluation of the peso high interest rates which was suddenly saddled to people who had their homes or business mortgaged lead to a record numbers of properties being repossed. By the time the crisis has passed, banks has imposed stricter regulations in acquiring loans. Prime lenders such as banks are now very strict when it comes to handing out home loans these days although current low interest rates makes it very attractive to get a loan.

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