There has been a lot of talk in the news lately about sub-prime mortgages and how they are affecting the housing market as well as some of the other economic sectors. Many consumers may be wondering just what are sub-prime mortgages. It is a fair question to ask, but a somewhat difficult one to answer.
One reason it is difficult to define sub-prime mortgages is because they can vary, and they can vary a great deal, in fact. Most of the sub-prime loans that were issued in the past had at least some of the factors that are detailed in this article, but the combination of factors were generally mixed. This one of the reasons why the sub-prime market grew so quickly; these loans could be all but custom-made to fit the individuals taking them out. In some cases that was fine, but in many other cases those exotic mixes of factors were a recipe for disaster.
Some of the factors that went into creating sub-prime mortgages include:
No down payment. Many buyers were thrilled with the prospects of moving into a new home with no down payment required. What some of these buyers did not fully appreciate was that they were now financing the entire amount of the home rather than what would have been the balance had a down payment been applied to the loan.
Low teaser rates. Many of the adjustable rate mortgages that ultimately ran into trouble (and will continue to run into trouble) had very low introductory rates. A large number of these loans had two year teaser rates that when laid out in dollars and cents made buyers believe that they could afford the home. What was not often considered was the monthly payment after those teaser rates expired and much higher rates went into effect. Some buyers went into contracts with a teaser rate of two percent but will find the rate shooting up to ten or eleven percent when it resets. For the majority of sub-prime mortgage holders the newer, higher rates are the main cause of concern and the main reason they will face foreclosure if they do not arrange for other loan terms.
Credit worthiness was also a major problem. Most families want to own their own home, but the truth is some people simply cannot afford the costs associated with homeownership. During the sub-prime heyday many buyers were moved into loans that creditors and realtors knew the buyer could not afford. Whether this was done out of compassion for the low-wage earner or out of corporate greed is another story for another time. The end result, however, is homeowners are losing homes because they simply do not have the wage levels needed to keep the home and to pay for the added costs of having a home.
There were many other factors that often played a role in the sub-prime mess including inflated home appraisals, false or misleading information on the credit applications that were turned into lenders, aggressive marketing that made promises to buyers that could not be kept, and many other issues, some of which are only now beginning to come to light.
The bright side to all of this is that perhaps some legislation will come about to help avoid these problems in the future.
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