The Subprime Mortgage Market Mess and what it Means to you

Are you tired of the subprime mess? Interesting question, and you may be wondering if the subprime housing mess may be affecting you. It you don’t understand what this means, well let me give you some information to increase your knowledge on this subject.

For the most part subprime lending is also known as second chance or b-paper lending.
Subprime loans are loans made to consumers who do not have the best credit and would probably pay a higher interest rate du to their not so stellar credit. These type of loans are both risky to borrowers and lenders because of poor credit history, high interest rates and other financial factors. Subprime loans are commonly utilized for home loans, car loans, credit cards and personal loans. In addition, subprime loans typically carry higher interest rates than prime A-loans for borrowers with good credit.

Subprime loans became more popular in the last few years due to the appreciation of homes, availability of more flexible adjustable rate mortgages and less rigid lending standards. The increase in appreciation created more equity in homes. This in turn allowed lenders to become more flexible in the loans granted to borrowers with less attractive credit via subprime lending. It is noted that this also created relaxed standards by the lender in checking a person’s credit history, income and requiring a down payment. In many instances, a consumer with poor credit was able to secure a home with no verification of income and no down payment required.

Adjustable rate mortgages are one of the major factors involved in the subprime mess. The adjustable rate mortgages consist of a variable rate that is linked to the current interest rates. These particular loans have been heavily used by lenders in the subprime market as alternatives to fixed rate mortgages. Lenders offered low introductory adjustable rates to attract more borrowers. By doing this, many people purchased homes with these type of loans.

You’re probably wondering, what happened to make borrowers end up not being able to make their mortgage payments? Well, what happened is that the federal funds rate went from one percent in 2003 and was dramatically increased to 5.5 percent. This increase in the funds interest rate was significant for the subprime housing problem because over a three year period it left many borrowers with mortgage payments that increased dramatically. This has created major problems for borrowers being able to continue making their mortgage payments. Some borrowers mortgage payments have increased as much as fifty percent or more from their initial mortgage payment. As an update, there is good news for some borrowers, the federal funds rate was just recently reduced in late January 2008 to three percent. The reduction of the federal funds rate may help some borrowers with the amount they will pay for their adjustable rate mortgages.

A significant problem with the interest only or adjustable rate mortgage loans that homeowners are currently facing in unison with their high mortgage payments is the fact that most lenders are not willing to work out an arrangement or compromise with the borrower to reduce their payment. It is noted that most of the adjustable rate mortgage and interest only loans were packaged and sold as a security for investors. The packaged mortgage loan security usually contains a clause restricting working out a compromise arrangement with the borrower. Hence the majority of adjustable rate mortgages and no interest loans renewed in late 2007 and set to renew in 2008 may result in numerous foreclosures for homeowners.

So does all of this information provided in this article affect you? If it does, you may want to consider contacting your lender or mortgage loan servicer to see if they would be willing to assist you with reducing your mortgage payment by getting you into a fixed rate mortgage loan you can afford. You can also contact Hope Now which is an alliance of mortgage counselors, servicers, investors and other market participants. Hope Now is an organization that reaches out to homeowners who are facing foreclosure and who need assistance in trying to remain in their homes. To obtain information concerning approved mortgage counselors or to discuss your particular mortgage problem, you may want to consider contacting the Hope Now hotline at 1-888-995-HOPE.