US Sub Prime Mortgage Crisis

The good and bad of sub prime mortgages has come to light in the current mortgage crisis in America. As mortgage defaults are at their highest in years, everyone wonders what caused this disaster.

Sub prime mortgages have variable interest rates and target people with little equity and ability to repay. These mortgages have lower fixed interest rates for the first couple of years and then convert to a variable rate which is often higher than the market rate. The new high interest rate will vary over the next 20 or so years, for the term of the loan, and cancel out any interest savings made in the first few years.

What we saw in the US in 2007, was a flood of sub prime mortgages converted from fixed term to variable. Homeowners were financially unprepared and at least one in five Americans defaulted.

How could this Happen?

The money business is complex and fraught with pitfalls, especially for those who fail to research the market. Around 2004, a combination of a booming housing market and low interest rates saw a lot more brokers enter the money market. There was plenty of money to finance high risk loans. Some brokers recommended sub prime mortgages for bigger fees from the lender.

Lenders then parceled up these high risk mortgages as collateralized debt obligations CDOs) and on sold them to private investors (such as mutual funds, etc). The investors used often up to 90% of borrowed money to finance these investments. This added another level of debt to already risky investments. Hence, the sub prime mortgage market was built on very shaky ground. The cycle continued when these risky mortgages were sold off over and over again as investments with high returns. Pension funds, insurance companies and even banks that would not finance these mortgages in the first place were among those that invested.

Avoid the Pitfalls

Buying a home is a risky business in the first place, only buy what you can afford. And if you can not afford that with a conventional loan be very wary of sub prime mortgage rates.

Go shopping for a loan the same way you would for any other big purchase. Do your research; check out all the options, even talk to a broker to see what they advise.

As more people default on their mortgages, lenders will crash and others will tighten their lending criteria. There is a lesson in this for all of us.

Thanks To : game Student Loan Digital Frame Compare car insurance rate Compare auto insurance prices Purchase Structured Settlements