Blog from Guest Author, Chris Crowe
Unless your head has been stuck in the sand, you've heard national news media outlets cover the subprime mess extensively over the past few months. Most of it has been a lot of hype. However, the reality is there is still a problem. People used subprime mortgages incorrectly or for the wrong reasons. A subprime mortgage was originally created to help those with credit challenges purchase homes. The mortgages provided low downpayment options and reduced income documentation. The result of that was a higher rate for the borrower. However, people who normally wouldn't qualify for a home mortgage could with subprime mortgages.
Most subprime mortgages were ARMs with initial fixed rate periods of 2 years. The 2 year period allowed people to clean up their credit issues and then refinance into a conventional mortgage. This is a good theory, but several problems exist.
- People didn't clean up their credit. Home values went down. Remember, most subprime mortgages had low downpayment terms. Some people ended up owing more than the house was worth. When it became time to refinance, they couldn't.
- Subprime loans were used to speculate on fast appreciating property. The low downpayment and reduced documentation appealed to people in search of quick money. Who cares if the rate is high? If you flip the property, it doesn't matter much. Well, what happens when you can't flip and are stuck with the payments?
What does this mean to everyone else? You have to look at the big picture and see what impact the subprime problem has on the market for mortgage-backed securities. Last week on CNBC, they had a gentleman explain this better than anyone I've heard. It's a shame, because it came on during lunch time in the middle of the week. An explanation like this belongs on the nightly news so everyone can hear it. It's slightly technical and uses some industry jargon, but it's pretty easy to follow.
You should always consult with a mortgage professional you trust before making any mortage finance decision. If you have any questions about this, please don't hesitate to contact me.
Thank you, Joe for allowing me to post on your blog. For information like this and more, please visit my blog.






