- A subprime mortgage is a mortgage loan given to a borrower with a high credit risk, who thus accepts a higher variable interest rate and less favorable terms than a "prime" borrower. Unfortunately, a lack of foresight has caused thousands of people to lose their homes when their interest rates soared and they could no longer afford their mortgage payments. The subprime meltdown is the accumulation of its effects, and has caused a high inventory of unoccupied homes and thousands of prior homeowners looking for apartments and houses to rent.
- The subprime meltdown officially began in 2006, though it was caused by subprime lending in previous years. In the beginning of the twenty-first century, lenders began offering adjustable-rate mortgages (ARMs) to prospective homeowners who couldn't qualify for "prime" mortgage loans based on their credit ratings and current income. In 2006, as home prices began to fall and refinancing options evaporated, many of these homeowners defaulted because they couldn't afford the higher interest rates. The subprime meltdown has continued through 2007 and 2008, and may continue for years to come.
- The subprime meltdown is different from all previous housing downturns in history because of the confluence of ARMs and few refinancing options. Homeowners had agreed to unpredictable mortgages, not realizing that inflated interest rates in the future would make those loans unaffordable. Without the ability to use their equity to refinance, they were forced into foreclosure. Furthermore, lenders have lost billions of dollars in selling off foreclosed properties at basement prices, and are therefore having difficulty recovering from those losses.
- The consequences of the subprime meltdown have extended far beyond real estate. For one thing, far more people are aware of the dangers of ARMs and subprime lending, and are therefore staying in rental properties until their financial situations improve. Many banks and credit unions have declared bankruptcy or merged with other financial institutions, and thousands of financial professionals have been laid off. Furthermore, homes are much more difficult to sell, and thousands of properties have remained vacant for years.
- Certain areas of the United States have been effected more dramatically than others. The subprime meltdown has been far more devastating in California, New York, Florida and Arizona than in Texas, Washington D.C. and Maryland. However, it is important to note that specific consequences can change from region to region, and even from community to community. For example, Houston is faring far better in the subprime meltdown than Dallas or San Antonio.
- Despite the panic surrounding the subprime meltdown, there have been a few benefits. First, prospective homeowners with solid credit and secure employment are able to find affordable homes much more easily than they could before the mortgage crisis. Second, rental properties are experiencing a significant increase in revenue because foreclosed homes produce thousands of renters. Many of the foreclosures have been auctioned for less than a quarter of their value, which is also beneficial for start-up real estate investors.
