Subprime Mortgage Crisis
One doesn’t have to go very far these days to overhear a conversation about the subprime mortgage lending crisis. The effects of this lending meltdown are being felt by everyone, from the neighbors who just had their home foreclosed to the hard-working co-worker who cannot qualify for a decent loan to purchase a starter home. With all the attention focused on the virtual meltdown of this lending practice, many people are still left asking the question, “What exactly is subprime mortgage lending?” Subprime mortgage lending is the practice of making loans to borrowers who do not qualify for prime interest rates because of their credit history. A weakened credit history may be the result of late payments, bankruptcy, foreclosures, repossessions, charge-offs, or overextended credit. Although subprime loans are often an inroad to home ownership for individuals with poor credit history, the borrowed funds come with certain disadvantages. First, these loans come with a higher interest rate in order to offset the lender’s increased risk due to the borrower’s poor credit. Second, this type of loan is often made in the form of an adjustable rate mortgage or “ARM.” Unlike conventional fixed 15-year or 30-year mortgages, ARMs offer initially low interest rates that increase after a period of time. Although subprime ARMs represent only 6.8% of the outstanding mortgages in the United States, they account for 43% of home foreclosures. As variable interest rates adjust upward, many borrowers are caught by surprise, having previously expected their monthly home mortgage payments to remain static or within an affordable range. After a rate increase, borrowers who are unable to make their monthly payments face foreclosure and loss of home equity. Perhaps most unfortunate of all, however, is that many families facing the brutal consequences of the subprime crisis had envisioned their home ownership as an investment to help them gain solid financial footing. Because of these dire circumstances, more than 30 states have enacted laws providing stronger protections for homeowners and stricter requirements for responsible lending. Such measures may give many families a true second chance at holding onto or reaching the American dream of home ownership. The subprime mortgage meltdown crisis has taught us one thing – make sure you understand and are fully aware of the terms of your home mortgage. If you do not know if your home mortgage is a conventional fixed-rate mortgage or a subprime ARM, review your loan documents today. If you have concerns, consult with a trusted mortgage broker to find out the steps you need to take to make sure that you and your family can enjoy your home and the American dream for years to come.