Toxic Mortgage Debt
The financial collapse of 2008-2009 introduced a number of new phrases into the popular language -- among them was "toxic mortgage debt." Unrecoverable or slow to recover mortgage debt payment had a large part in the crisis that gripped the U.S. during those latter stages of the first decade of the 2000s -- a part that resulted from mortgages that were unwise transactions for the consumer from the outset or turned sour once the housing market collapsed.
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Adjustable Rate Mortgages
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One of the first mortgage products to turn toxic in the late 2000s was the adjustable rate mortgage. When home buyers saw their monthly payments grow enormously, the low teaser interest rates suddenly seemed like a bad bargain.
Unlike the traditional fixed interest rate mortgage, ARMs begin with a low "teaser" rate that readjusts, sometimes within months. Each time the rate adjusts, the potential exists for the mortgage payment to double. Each time the rate adjusts, many homeowners who cannot find refinancing are adjusted out of homes that have suddenly become unaffordable.
Subprime Mortgages
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To understand the toxic debt caused by subprime mortgages, an understanding of a "prime" mortgage is necessary. Mortgages with prime rates are offered to home buyers with a good credit history and a reasonable down payment. Subprime mortgages, on the other hand, are offered to home buyers with poor credit and who are willing to take higher interest rates and less favorable terms. The problem with subprime mortgages is that those who qualify for these mortgages are often unable to meet their obligations, resulting in defaults and foreclosures.
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100 Percent Mortgages
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One of the basic components of the traditional mortgage is the down payment. More than just a payment toward a home, a down payment shows lenders that you are serious about saving money toward a purchase, and are therefore unwilling to part with that money irresponsibly. Perhaps the most toxic of bad mortgage products, the 100 percent mortgage allowed unprepared consumers to purchase homes with little or no down payment. The result is, when buyers who took out 100 percent mortgages were no longer able to make the payments, they had little to lose -- but the banks had plenty to lose.
Upside Down Mortgages
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The upside down mortgage doesn't necessarily spawn from a bad mortgage product; rather, it is the result of several negative factors. Plummeting home values, lack of equity in the home, one or more mortgages and an inability or unwillingness to continue paying all result in a home that is now worth less than when it was purchased and/or than the amount of the mortgage. While ARMs, subprime and 100 percent mortgages contribute to the toxic mortgage debt caused by upside down mortgages, many people who went into a traditional mortgage also lost the equity in their homes when the mortgage crisis destroyed the housing market. An upside down mortgage is an example of a toxic mortgage debt that is likely to stick around as long as a recession does.
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