Subprime Mortgage

lending is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the ability to prove that they have enough income to support the monthly payment on the loan for which they are applying.  Subprime lending evolved with the realization of a demand in the marketplace and businesses providing a supply to meet it.  Subprime lending takes away the prime loans in a community mortgages, car loans and lines of credit.

Subprime mortgages totaled $600 billion in 2006, accounting for about one-fifth of the mortgages in the US. The scary thing is that a Subprime mortgage loans are riskier loans because they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history.  As a result Subprime mortgage loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender.

These risks are increased if borrowers are not adequately informed of the product features and risks, including their responsibility for paying real estate taxes and insurance, which may be separate from their monthly mortgage payments.  Similarly, if borrowers do not understand that their monthly mortgage payments do not include taxes and insurance, and they have not budgeted for these essential homeownership expenses, they may be faced with the need for significant additional funds on short notice.

This brings us to the topic of foreclosure. Foreclosures in the subprime mortgage marketplace are expected to cost Americans homeowners as much as $164 billion in lost equity from 1998 through 2006, the center reported.  The sharp rise in foreclosures after the housing bubble caused several major subprime mortgage lenders, to shut down. Some were even accused of actively encouraging fraudulent income inflation on loan applications, leading to the collapse of stock prices for many in the subprime mortgage industry, and drops in stock prices of some large lenders. 

Think of the impact of all the foreclosures, short sales and auctioned off homes on the price of real estate. Anyone facing foreclosure should be aware that there is one very important alternative to avoid the foreclosure and that is the Short Sale.  A Short Sale is an established way for a homeowner who owes more than the house is worth to avoid a foreclosure and the subsequent credit hit.
 

The subprime mortgage market has grown because such lending has been profitable, demand from borrowers has increased, and secondary market opportunities are growing.  Due to sharp growth in the subprime mortgage industry, it appears that the abuses by subprime lenders are on the rise.  We must act now to create policies that will help protect American families as they grapple with subprime mortgages.