The paper "Financial Distress in Corporate Finance" is an outstanding example of a finance and accounting article. Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Financial distress is a term in Corporate Finance used to indicate a condition when promises to creditors of a company are broken or honored with difficulty. Sometimes financial distress leads to bankruptcy. Financial distress at the individual or household level is simple insolvency, failure to repay the loans, to meet routine expenses and so on.
In the United States, the subprime mortgage financial crisis of 2007 consummated Financial distress at both organization and household. Let's see an example: ``A family, Husband-Wife both working, with their combined income around $65,000 a year, purchased a modest ranch house, say in Boston's Hyde Park neighbourhood for $300,000, taken on loan. The family was paying it comfortably in instalments. After two years, they got it refinanced (on different terms) and got a fresh loan from a lender. But that lender has since gone under.
In fact, the lender had written too many loans that customers didn't or couldn't payback. The monthly payment on the $300,000 loan started at about $2,100. Then, the payment was re-structured at an accelerating rate of more than $300 a month, and soon adjusted to about $2800 per month. In the next six months, payments increased to even higher levels. Since nobody has any idea how much this monthly payment would go up and consequently the buyer found himself unable to afford his home. '' The subprime mortgage That was the case of the subprime mortgage financial crisis of 2007.
As per definition, the overall conventional mortgage market includes two broad categories of loans, prime and subprime. Prime mortgages are still the largest category, representing loans to those borrowers who are regarded as good credit, ``A'' quality, or investment grade. Everything else is called subprime – i.e. loans to borrowers who have a history of credit problems, insufficient credit history, or nontraditional credit sources. Subprime mortgages are rated by their perceived risk, from the least risky to the greatest risk. Amazingly the worst kind of borrowers accounts for 50 to 60 percent of the entire subprime market.
A Ripple, Not a Tidal Wave: Foreclosure Prevalence and Foreclosure Discount,'' the study by
Christopher Cagan, Ph.D., director of research and analytics at First American Real Estate Solutions,
First American CoreLogic, www.facorelogic.com.
Mortgage Bankers Association , http://www.mbaa.org/NewsandMedia/PressCenter/58758.htm
Rick Brooks and Ruth Simon , Subprime Debacle Traps Even Very Credit-Worthy ,
As quoted by Rick Brooks and Ruth Simon , Subprime Debacle Traps Even Very Credit-Worthy.
Countrywide Reports 2007 First Quarter Results,