Sub-Prime Mortgages: An Explanation
A sub-prime mortgage is that which is given to homeowners who have less than a stellar credit rating.
For example, someone with a FICO score of 600 or lower may be eligible for a mortgage, but the interest rates would be much higher than for someone with a FICO score of 700 or above.
The sub-prime mortgage crisis was a result of homeowners who dealt with unscrupulous lenders. These lenders offered mortgages, in some instances, with no money down. They then resold the mortgages to others and the interest rate dramatically rose, and the homeowners were unable to meet the monthly payments.
As a result, most banks are holding what is called “toxic mortgages,” and while the Treasury Department gave them bailout money so they could begin lending again, instead they are holding on to the money in expectation that there will be additional foreclosures.
Lenders who offer sub-prime mortgages often charge exorbitant interest rates based on the risk factor. We know that many banks became insolvent as a direct result of these toxic mortgages.
This sub-prime mortgage crisis had a direct affect on the stock market and, as they say, the rest is history. The banks stopped lending, businesses could not restock their inventory, and many companies are going out of business or merging with larger companies.
Currently, the Federal government is debating whether or not to buy these toxic mortgages from banks (which was originally the case with the first bailout money), but since the value of homes is in decline, a determination of how much to offer for these unpaid mortgages is a major consideration.
Recently, there were news reports that predatory lending has begun again. This can only cause undue hardship for homeowners in particular, and for the global economy in general.
The best course of action for anyone considering buying a home is to wait until their credit standing has improved and their FICO scores are in the low to mid 700s. In addition, it is also recommended that a down payment of at least 25% or more would be required for banks to even consider a mortgage.