Subprime Mortgage Crisis: The Multinational Financial crisis

Subprime Mortgage Crisis

The United States Subprime mortgage crisis was a Multinational Financial crisis that occurred between 2007 and 2010.

Subprime mortgage financial crisis can be described as a sharp and unprecedented rise in home foreclosures that occurred due to the defaulting in subprime mortgage loans. This started during the fall of 2006 in the United States and ended up eventually becoming a global financial crisis within a year. Subprime mortgage crisis indirectly contributed to the Global financial crisis of 2008

There are many varieties of mortgage loans available in the market:  Fixed Mortgage Loan, Adjustable rate mortgage loan or ARM, Balloon Loan and  Subprime Loan.

Subprime mortgage loans are those that are offered to high credit-risk borrowers with lower income or tainted credit history. These loans are primarily adjustable-rate mortgage loans where the interest rates are low for the initial 2-3 years and are thereafter readjusted to a higher rate.

As a result of this, the monthly mortgage payment increases to a value that becomes difficult for the borrower to pay. Due to this, several borrowers default with their loan repayment resulting in home foreclosure. Adjustment in the interest rates occurs periodically. These adjustments occur every six months to one year.

The most affected by this crisis are the minority communities living in the United States including African-Americans, Latinos and Hispanics. According to a study conducted by the Wall Street, more than 20 percent of sub prime mortgage loans issued between 2005 and 2006 are being projected to end up as defaults.

More than 2 million borrowers with subprime loanswere facing the risk of home foreclosures and about $164 billion is lost due to foreclosures in subprime mortgage market.

Subprime mortgage crisis has even affected the flow of funds into and from the market. Lenders provided credit to borrowers but are unable to retrieve the amount due to loan defaults.

Unable to withstand this, several subprime lenders are filing bankruptcy and many others have already closed their operations. Other lenders, who are able to withstand the market crisis, are now resorting to more stringent standards and making it difficult for people to obtain loans. 

The sub prime mortgage crisis and a depleting real estate market in the United States has resulted in millions of people facing the risk of losing their homes due to foreclosure.

With the objective of extending a helping hand to borrowers affected due to sub prime home loans, the Federal Housing Administration (FHA) has introduced new lending policies known as FHA Secure Loans.

Subprime mortgage loans are primarily high-interest ARM loans. The interest rates are at a bearable level during the initial 2 to 3 years. At the end of this initial low-interest period, the interest rates are adjusted according to market index.

Several borrowers find it difficult to make mortgage payments once the interest rates get adjusted. As a result, they end up as defaulters. FHA Secure plan is aptly suitable for such borrowers.

Under this plan, borrowers who default with the loan repayments can have their sub prime mortgage loans refinanced. This plan allows delinquent hybrid ARM borrowers to move into reasonable, fixed-rate mortgage loans. However, only borrowers having a creditworthy history before the interest rates were adjusted are eligible to apply for this plan.

This plan is highly beneficial for low and middle-income American families as it helps the families from losing their homes to foreclosure. In order to be eligible for this loan, applicants must have a good employment history and should be able to earn a monthly income sufficient enough to make the mortgage payments.

Another advantage of this plan is that it requires the homeowner to make very low down payment. The applicant must keep three percent of the loan value in cash or homeowner equity.

Anything I Missed?

And now I’d like to hear from you:

Or maybe you have a question.

Either way, let me know by leaving a comment below right now.

Disclaimer

Leave a Comment