Subprime Mortgage Crisis

Hello all! Today I decided to touch on an issue that has probably affected someone you know, the subprime mortgage crisis. Subprime mortgages have created an unstable economy as a result of lenders loaning funds under unrestrained guidelines. These loans were based off of lenient credit requirements and limited documentation. One type of subprime loan, a no documentation loan, was provided to the borrower for 100% of the residential property’s value. This created a large risk for the lenders because the income of the person was not verified and a credit score of less than 660 was accepted. The majority of these people had low credit scores for lack of responsibility in past debts owed; however, the lender’s raise in overall profit made for their acceleration of practices in loaning money to unqualified candidates.

An interest only loan was also a popular loan program made to entice borrowers of low loan payments. The risk was that they were able to qualify for a loan, never being able to pay down the principal value in the home. One missed paycheck or a family member falling ill and incurring substantial medical bills could cause an unavoidable foreclosure. The economic welfare of the nation suffered considerably because of declining values in comparable sales used for an appraisal to assess the value of a property. This was harmful because it discouraged the purchase of homes and the repayment of monies owed to banks. Also, refinancing for subprime mortgages allowed consumers to borrow against the equity in their home. One missed payment would also force these borrowers into foreclosure, obligating the lender to take ownership of the house and not the money owed.

Another subprime mortgage which was most responsible for creating the economic downfall, in my opinion, was ARMs, adjustable rate mortgages. This had the terrible effect of increasing foreclosures because of a lack of planning from the borrowers which had this loan program. The lenders would lock in an interest rate at a fixed value for two to ten years and then when the fixed rate term was over, the mortgage would adjust upwards. This increased the risk of foreclosure because the borrowers were qualified only on the basis of their debt-to-income ratio for the fixed portion of the loan. After the term had expired, their monthly payments would increase by hundreds of dollars. This was yet another reason why foreclosures did occur. In the future, the economy will not incur the great risk of failure if there are stricter lending standards enforced. Loaning money to people with low credit scores, high debt, lack of income and negligible down payments are factors which caused them to default on the loans given to them. The banks should have better standards, which in turn would better ensure the repayment of these loans.

Sources:
1. http://useconomy.about.com/od/economicindicators/tp/Subprime-Mortgage-Primer.htm

2. http://community.investopedia.com/news/IA/2007/Subprime_Reality_Check.aspx

3. http://news.bbc.co.uk/2/hi/business/7073131.stm