The Subprime Mortgage Scare

♦ September 5, 2013 ♦ Leave a comment

Subprime mortgages were a timely topic at the time when people very interested in mortgage. As mentioned, subprime mortgages and refinancing are loans that are offered to borrowers with credit blemishes – bankruptcies, low credit scores, home loan rates, or a record of poor use of credit.

These kinds of loans carry higher rates and fees than borrowers with good credit pay. As home values rose over the last two decades of the twentieth century, it was difficult for these particular customers to get into what is known as the prime mortgage market. But lenders didn’t want to lose the opportunity at the extra dollars. So, anticipating the real estate market’s continued rise, they began extending these higher-rate mortgages to more and more customers. According to Inside Mortgage Finance, subprime loan organizations grew from $160 billion in 2001 to $600 billion in 2006.

If you’ve had credit trouble in the past, don’t simply assume you’ll be stuck with a subprime. You above all mortgage shoppers need to particularly astute. Take the time to query local lenders on their requirements in terms of credit report and credit score improvement before they do business with you, and use their answers to press other lenders for similar information. Be straight with them about your desire to clean up your credit, and see if you can build relationship with them even if they say they can’t lend money to you right now.

About 75 percent of the subprime adjustable rate mortgages offered in 2006 were loans with a flat introductory rate for the first two or three years and then a higher floating rate for the life of the thirty-year mortgage. The “floating” part of the rate agreement is what’s gotten so many borrowers in serious trouble.

Why is this information useful over the long term? In many area of finance, history repeats itself. When markets are good, lenders get as sloppy as the borrowers. Learn the lesson: Never get talked into a loan that will cause you problems down the road.

How Lenders Make Their Money

An indicated above, lenders frequently don’t make the bulk of their money on holding a loan for the full borrowing term. They make it in volume – bringing in loan applications, changing fees to the borrower to complete the loan, and very likely remaking that loan at a later time, earning more income in the process. Why is that? So many borrowers refinance today and go from lender to lender that lenders like to make their money up front. It’s like this for different home loan types as far as the lender is concerned.

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