Subprime Mortgage Problems
According to Investopedia, a subprime mortgage is a mortgage that is given to poor credit borrowers. Typically, subprime mortgages are adjustable rates mortgages that carry higher interest rates and less favorable terms than traditional mortgages.
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History
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Subprime mortgages started in the mid-1990s to respond to a need for borrowers with less favorable credit histories and scores to obtain financing for homeownership. With less stringent guidelines for qualifying, the subprime mortgage market is at a higher risk than the traditional mortgage markets. In late 2006, the subprime mortgage market crumbled in response to the economic and financial downfall of the U.S. economy, housing and lending markets. Eventually, this led to what many financial experts believe was a recession.
Effects
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In exchange for mortgage approval, some of the problems that come along with taking on a subprime mortgage as a borrower include a higher interest rate, interest-only payments that do not chip away at the principal balance and negative amortization.
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Fraud and Misrepresentation
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Starting around 2005, many subprime mortgage lenders further relaxed lending guidelines, which made it even easier for borrowers with blemished credit histories to obtain mortgages. In order to qualify borrowers, many subprime mortgage lenders even created fraudulent documents or misrepresented borrower situations in order to get underwriters to approve the borrowers for mortgages. This put the subprime mortgage lenders at further risk because the loans given by the lender were provided to even less than qualified borrowers than originally anticipated.
Defaults
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By 2006, the number of defaults in the subprime mortgage market increased. Foreclosure rates were also up. While default and foreclosure of subprime mortgages is problematic on its own, many of the subprime mortgages had also been bundled and sold as a part of mortgage packages referred to as mortgage-backed securities. Since these mortgage-backed securities were sold to investors, the default and foreclosure program spread like a disease into national and international financial markets. Rather than containing the issue to the subprime market, the problem began to spread into other real estate and financial areas.
Deregulation
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One of the major issues that lead to the collapse of the subprime mortgage market was the fact that the subprime mortgage market was not as highly regulated as it should have been. While the mortgage industry in general does have some regulations it is required to follow, Congress and the Presidential Administration say that more federal and state regulation are required so that fraud and misrepresentation on the part of mortgage professionals or borrowers in the subprime market are kept at a minimum rate.
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References
- Photo Credit mortgage image by hans slegers from Fotolia.com
