|
Subprime
Mortgage Lending - What Are Its Effects?
By Jane A. Smith
Subprime
lending is really nothing new. It was originally designed
to enable people with less-than-sterling FICO scores to
purchase homes, cars, and other items for which they
couldn't get conventional loans. Also known as
"second chance" lending, its purpose was to
provide responsible individuals with a second chance to
become homeowners. In the mid-1990s, with real estate
values continuing to climb, subprime lending became very
popular. Unfortunately, many of the people who got
involved with subprime lending were not really
responsible, or did not fully understand what they were
getting into. Some of them interpreted subprime lending
as a means of buying a house without a down payment;
others saw it as a means for entering a real estate
market that was changing very rapidly. Subprime lending
was never intended for these purposes.
You can see the effects of misuse of subprime lending in
real estate markets all over the United States. For
example, people who have bought homes during the last few
years using subprime lending usually have not been able
to provide a down payment of 20% on their purchase.
Private mortgage insurance (PMI) is required in such
cases. Private mortgage insurance is available at
additional cost to the buyer, above and beyond the
required homeowners insurance. With PMI, the lender has a
guarantee that if the buyer defaults on the loan, the
mortgage amount will be repaid to the lender. The cost of
PMI is now deductible from the buyer's income tax!
Defaults on subprime loans are becoming more and more
common. One reason for this increase in defaults is that,
lulled by the ready availability of subprime lending,
many people have purchased homes they really cannot
afford. Some of these are carrying adjustable rate
mortgages (ARMs), which are readjusted every couple of
years - always upward. In past years, someone who was
interested in an ARM needed to qualify not only for the
initial rate, but also for two subsequent upward rate
adjustments. In recent years, this has not been true.
These ARMs have been offered at extremely low
introductory "teaser rates," and those who
qualified for the introductory rates were not required to
qualify for subsequently adjusted rates. Rates have gone
up by several percentage points. Mortgage rates for many
people have nearly doubled. In combination with the
record high cost of gas and oil, along with steadily
rising prices for food and commuting by public
transportation, this means that large numbers of families
are unable to continue to pay on their subprime
mortgages.
Another effect of easily-available subprime loans is that
many people who knew nothing about real estate or
property management decided to buy real estate. One
reason real estate prices were driven to levels that were
both unrealistic and unsustainable is that
"flipping" properties had become common. This
means that people were purchasing real estate,
"fixing it up" a bit, and then reselling it for
a very good profit. In time, these artificially high
"bubbles" burst. Prices fell suddenly and
dramatically, and these inexperienced individuals found
themselves with property they had bought with the
intention of reselling quickly -- and with no buyers. The
value of many of those properties is less than the amount
owed on them. Foreclosures are rampant. Foreclosure sales
in a particular neighborhood reduce property values in
that neighborhood still more. This kind of cycle is not
easy to break.
Subprime lending, then, can be an excellent way to
provide a second chance to restore credit and to purchase
a home. On the other hand, its effects can be very
dangerous if they encourage inexperienced individuals to
jump into a rapidly-changing real estate market. Be sure
you understand the expected effects before you take any
action involving subprime lending!
Discover the Effects Of Subprime Lending as well as learning more
about the Evils Of Subprime Lending and how it affects
you when you visit http://www.subprimelendingcrisis.com
|
|
