Sub-prime Mortgage Meltdown

By: Bryan Burbank

Looks like this years spectator sport is all about the nations collapse in the sub-prime mortgage market. it seems now that each and every day we hear of someone who lost their job, a home owner who is behind on their mortgage and is about to be foreclosed on, or that investor who just lost 60% of the value of their stock, Ouch! What can we do? Who is to blame?

The first thing we need to know is what is the sub-prime mortgage market? These types of loans are usually made to a person with poor credit, fico scores below 630. usually the loan requires low or no down payment to get in, and will have an adjustable rate after the first two to three years. These initial rates are called teaser rates and can be very low to get someone in a home. Usually in the first years of the loans the actual principal balance is not paid down at all, you are paying only interest. In some cases the principal actually goes up which is referred to as negative amortization. So now you got your new home, what went wrong? First of all you have people who can barely afford the teaser rate they got from their lender, so when the interest rate raises their monthly payment they can not keep up. Now about 2 million such loans are delinquent, this represents about 13% of all sub-prime mortgages. When a large number of these homes fall into foreclosure, the residential housing market, and to a large degree the whole nations economy, will be negatively affected.

Let us be aware that this problem is no big surprise to the financial markets, who's sound lending practices are very well established. These institutions know a good loan from a bad one, and even several federal agencies warned of this event back in 2005. The Treasury department and the Federal reserve both issued warnings to lenders not to grant loans to people who can not pay for them.

Who was the people to gain from these types of loans and why would they do it? A lot of the money maid went to property appraisers, escrow officers, real estate brokers, mortgage loan processors, and a bunch of other people involved in the loan process. These people speculated on these properties only to gain a quick buck in the short term and did not care about who would get hurt down the road. Look at all those sub-prime lenders who made big bucks on points and fees with the first loans. The situation we are in is only going to get worse before it gets better and we need to have more laws in place to prevent this from happening again.

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