By Karen Ramsey
Subprime mortgage lending has been a popular topic in the news lately. It’s even been discussed in our own Money Wise Women blog (see “A Womans Lifetime Lender - Protecting Women and Their Families” by Marcia Rodriguez). So I thought I would provide a little background on what Subprime mortgages are and why they are in the news.
What is a Subprime Mortgage?
There are three basic classifications of mortgages: Prime, Alt-A, and Subprime.
Prime mortgages are those given to borrowers deemed to be most credit-worthy by lenders, based on their credit score and past payment history.
Alt-A mortgages are used by borrowers who, among other things, may not be able to verify their income. These mortgages have higher interest rates than Prime mortgages because the borrowers are seen as more risky.
Subprime mortgages are those given to borrowers with the lowest credit scores. These mortgages carry the highest interest rates of the three classifications because these borrowers are seen by lenders as the greatest risk for not repaying borrowed funds.
Why all the talk about Subprime Mortgages in the news?
In the last year many borrowers of Subprime mortgages began to default and lose their homes to foreclosure. This was followed by the failing and bankruptcy of several Subprime lenders.
How did this happen?
Many believe that Subprime lenders utilized predatory lending practices to convince borrowers to agree to unfair or abusive loan terms. In addition to predatory pricing, factors for the rash of Subprime foreclosures included a lack of government oversight and overvaluation of homes by brokers.
Some believe borrowers are to blame for taking on more of a mortgage obligation than they can afford.
What is the Solution?
The solution to the Subprime Mortgage situation is not clear yet. Many government officials seem opposed to a bailout for Subprime borrowers. Private equity firms feel that any sort of help to these borrowers is an unfair economic advantage.
There is hope. Several large mortgage lenders are working with their clients to adjust their loan obligations in order to prevent default and foreclosure on their house. Additionally, borrowers are taking more responsibility for learning about how their mortgage loan works – like reading articles such as this!
www.ramseyinvesting.com | www.karenramsey.com | www.ramseyassoc.com
It is amazing to me that the US has not become comfortably aware of the 2nd loan (or ALOC/HELOC technique) to pay off their mortgages within a third of the time, without changing their lifestyle. The traditional way in the US, of paying off a mortgage loan faster by paying more on the principal each month, is much slower and requires your own money.
Posted by: Rachel Garner | September 14, 2007 at 04:18 PM