Real Estate & the Sub-prime Mortgage Bust

By: Kinan Beck

"If you've been paying attention to the real estate market over the last couple of years, you've probably heard the term 'sub-prime mortgage bust'. You might even have a vague idea that this is a current real estate problem which is causing problems in the American economy. And if you're just the average person out there in the world, you might not need to know any more about the sub-prime mortgage bust. But if you're a home owner who borrowed money on a sub-prime mortgage or a person currently interested in purchasing any sort of real estate, you should know more about this issue.

First things first. To understand what occurred in the sub-prime mortgage bust,you have to know what a sub-prime mortgage is. Basically, when there are borrowers who can not qualify for regular home loans because of their poor credit, they can apply to get a sub-prime mortgage loan. There are different types of sub-prime mortgage loans including interest-only, choose-your-monthly payment and fixed-to-variable-rate loans but they are all loans made to borrowers who don't qualify for prime rates and so must get sub-prime rates on these.

Unfortunately, while this can be a great idea for buyers who make good payments on their loans, there are inherent problems with the sub-prime mortgage plan. The main problem is that people with poor credit histories often have poor credit habits and therefore end up not being able to maintain the payments on their sub-prime mortgage. This leads to bankruptcy cases and foreclosures of the home.

And we've recently found out that when this happens on a large scale, it can cause negative effects in the stock market, the real estate market and the American economy. The sub-prime mortgage bust started at the end of 2006 and has been an ongoing problem. Although there are many details to what happened and individual cases to consider, the basic story is that hundreds of thousands of people who had sub-prime mortgage loans defaulted on those loans which caused their lenders to file for bankruptcy.

The bankruptcy cases filed by these lenders ultimately affected the stock market. One of the most significant cases was the closing of New Century Financial Corporation which was one of the largest sub-prime mortgage lenders in the market. When this company and others like it filed for bankruptcy, the market began to crash. This has had a ripple effect on related markets including the national real estate market and the overall economy. Okay, but so how does all of this affect you?

In most cases, sub-prime mortgage lending problems aren't going to affect you directly as a home buyer. However, you should be aware of the bust in order to make sure that you don't become a victim of it. You should also stay on top of the trends that it is causing in the real estate market to make sure that you're buying isn't affected. Besides, it's an important topic today and you'll want to be able to discuss it when it comes up. No one looks good when they're left in the dark."

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