The recent slide in the equity markets on Wall Street can be directly tied to the mess that was created in the subprime mortgage industry. What has resulted is a meltdown of the entire industry.
How did the mortgage industry get to this situation and what exactly is a subprime mortgage loan? Subprime mortgage loans are loans made to borrowers who possess a low credit score or a poor financial background. Over the last past decade, the subprime mortgage market has grown at an amazing rate. This has allowed individuals who may have not normally been able to obtain a mortgage loan the opportunity to do so.
After the slowing down of the economy between 2002-04, the Federal Reserve lowered Interest Rates to historically low levels. During this period, homeowners refinanced their homes to take advantage of the rate drops. Serving as a mortgage loan officer, I personally witnessed borrowers who refinanced their homes at least THREE times in the space of less than 3 years! This is unprecedented in the area of personal finance and home ownership.
Seeing an opportunity, mortgage lenders used the availability of cheap money to make available loans to anyone and everyone. While providing loans to as many borrowers as possible is never bad; the requirements and the type of loans were what was suspect.
The mortgage industry began to add new terms to their lexicons with loans as "no doc" or "interest only loans". This is where the problems erupted. These "exotic" loans were new to the industry and wisely or unwisely took advantage of the market. Subprime loans were being offered to individuals of dubious credit knowledge that teased them with very low starter interest rates or payments. Usually, at a period of 24-36 months these rates would increase to the current interest rate. Many borrowers had the mindset that they would just refinance their mortgage at the time of the recalibration of the loan in order to get a better and more stable interest rate.
As you can see, this has not been the case with many homeowners. An overall slowdown in the real estate market has been a nail in the coffin for many borrowers who are now experiencing foreclosure notices. We can only wonder what is in store for the equity markets continue to suffer.
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Making sense of subprime mortgage loans and the looming credit debacle.
1 comment:
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