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Bush to announce sub-prime plan Bush to announce sub-prime plan
(about 2 hours later)
US President George W Bush is expected to set out plans later on Friday to help homeowners with sub-prime mortgages avoid defaulting.US President George W Bush is expected to set out plans later on Friday to help homeowners with sub-prime mortgages avoid defaulting.
Sub-prime mortgages are higher risk loans offered to people with poor credit ratings or on low incomes.Sub-prime mortgages are higher risk loans offered to people with poor credit ratings or on low incomes.
Rising numbers of defaults on such loans have hit banks, which have bought debt that include these loans.Rising numbers of defaults on such loans have hit banks, which have bought debt that include these loans.
President Bush is also expected to discuss ways to prevent such a crisis happening again in the future. US Federal Reserve chairman Ben Bernanke is also due to talk about the ongoing problems on Friday.
He is likely to allow the government-backed mortgage insurer - the Federal Housing Administration - to guarantee loans for borrowers who are more than 90 days behind with their payments, according to the Wall Street Journal. Loan guarantees
He is also expected to highlight the need for strong enforcement of laws that prevent irresponsible lending. Reports suggest President Bush will call for Congress to support his plans to allow the government-backed mortgage insurer - the Federal Housing Administration - to guarantee loans for borrowers who are more than 90 days behind with their payments.
Democrats claim the Bush administration has failed to make sure regulators oblige lenders to properly check whether borrowers will be able to repay their loans. Many US sub-prime borrowers risk losing their homes
President Bush is also expected to discuss ways to prevent such a crisis in the mortgage market happening again.
This is likely to include highlighting the need for strong enforcement of laws that prevent irresponsible lending.
Democrats claim the Bush administration should have done this when it first came to power.
Emergency funds
Mr Bernanke will discuss the ongoing housing market and credit woes in a speech to the annual gathering of international central bankers and economists at Jackson Hole in Wyoming.
Bear Stearns is one bank that has already been affected
Analysts will be looking out for indications that the central bank's rate-setters will cut the cost of borrowing by one quarter of a percentage point at their next meeting on 18 September.
The Fed has so far released billions of dollars of emergency funds into the financial system in an attempt to ease fears over the lack of available credit.
It has also cut the interest rate at which it lends to banks.
"It's pretty important because Bernanke's going to talk about housing," said Binay Chandgothia, chief investment officer for Principal Asset Management.
"And housing is perceived to be what is causing consumer confidence to go down."
Record defaultsRecord defaults
The crisis in the US sub-prime mortgage sector has been caused by American mortgage rates rising sharply over the past year.The crisis in the US sub-prime mortgage sector has been caused by American mortgage rates rising sharply over the past year.
Many US sub-prime borrowers may risk losing their homes
This has meant a growing number of sub-prime borrowers have been unable to meet their monthly payments as their initial low rates expire, leading to record levels of defaults.This has meant a growing number of sub-prime borrowers have been unable to meet their monthly payments as their initial low rates expire, leading to record levels of defaults.
The result has not only been significant financial difficulty for banks and investment firms heavily exposed to the sub-prime market, but also the recent stock market turmoil.The result has not only been significant financial difficulty for banks and investment firms heavily exposed to the sub-prime market, but also the recent stock market turmoil.
This is because of fears that the crunch in the sub-prime sector will spread to the wider loans market as banks become far more cautious about who they lend to. This is because of fears that the crunch in the sub-prime sector will spread to the wider loans market as banks become far more cautious about whom they lend to.
The situation has been exacerbated by the fact that sub-prime debt is often resold as part of a wider debt package, meaning that banks and investors are, as yet, unsure about how far and wide the sub-prime downturn could spread. The situation has been exacerbated by the fact that sub-prime debt is often resold as part of a wider debt package, meaning that banks and investors are, as yet, unsure about how far the sub-prime downturn could spread.
A number of firms have already been knocked by the turmoil, most notably the US investment bank Bear Stearns.
Its former co-president Warren Spector stood down earlier this month following the collapse in June of two mortgage funds that he had headed.
There have also been predictions of job losses on Wall Street and other financial centres around the world as a result of the market turbulence.