For those of you following the mortgage crisis that has enveloped America and the rest of the world you’re probably all talking about those subprime mortgages and the people who have them. Some of you may even know someone who has one and has defaulted on their mortgage causing them to sell far below their current house value or even foreclose.
What you may not know is that the subprime mortgages are mortgages whose interest rate is below federal prime level (although this may be the case in some mortgages) it usually means that mortgages were given to people who couldn’t qualify under normal terms. Maybe their credit score was bad, so they were given a rate to get them through the next 3 to 5 years, called an ARM. Once they got on their feet, got their credit back to normal they could get a fixed rate afford their house.
Problem is, these borrowers weren’t given a financial education to go along with this borrowing that took place. Whose fault is that? Who knows.
Most traditional mortgages require you to put 20% down to cover the bank in case they have to foreclose. The bank then has at least 20% as an asset to cover any sudden downswing in the housing market. These subprimers were able to get loans for both the 20% down and the 80% remaining by paying a small fee called mortgage insurance. These insurance rates, usually enough to deter borrowers from going 80/20 loan routes were lowered and allowed risky credit apps.
The list goes on about what was wrong with this lending. But the bottom line is that subprime doesn’t mean just below prime rate, usually it means people with risky credit scores getting in way over their heads.
decide to wish you Thanks. Eugene
