One of the mortgage news items that we continue to hear about is the subprime mortgage crisis. While it may seem as though there is no need to continue reporting on the issue of subprime mortgage news, the truth is that the fallout from subprime lending continues today.
Even though the situation has improved in some areas, there are still problems that remain – including concerns that not all the subprime mortgage loans have made it through the market. Because the subprime mortgage crisis was such a huge disaster for the wider economy, don’t be surprised to hear about more in relation to mortgage news.
What is a Subprime Mortgage?
In order to get a proper perspective on the mortgage news related to subprime borrowing, it helps to understand how subprime home loans work. Mortgages that provide borrowers with the best interest rates are known as prime loans. Those who get prime mortgages have good credit and are less likely to default on their loans.
If you have poor credit and there’s a greater risk that you won’t repay your mortgage, you will have to pay a higher interest rate. This is known as a subprime loan. Mortgage news sources point out that these subprime loans were instrumental in the subsequent financial crash.
Many subprime mortgage loans were offered as adjustable-rate mortgages, with low initial rates, and then higher rates later. This allowed those who might not have originally been able to afford a larger mortgage to borrow more money, even though they did not have very good credit. Borrowers eager to get what they could (instead of thoughtfully considering what they could afford), combined with mortgage lenders eager to earn more from bigger loans that they could sell off to others (limiting their risk exposure to default), created a situation that led to a mortgage market crash.
How the Subprime Mortgage Crisis Harmed the Economy
When paying attention to mortgage news, you will see that there is plenty of blame to go around. The bottom line is that the real estate market began cooling at the same time that many teaser subprime rates were ready to re-set. Borrowers couldn’t make the higher payments, and, due to the mortgage news about the cooling real estate market, they couldn’t refinance to lower fixed rates because they didn’t have enough equity in their homes. As a result, many of these borrowers – who were known default risks – became delinquent on their loans.
Because many of these loans were sold and packaged into securities, the effects began to ripple. Mortgage lenders had to accept losses, and securities with these bad loans dropped in value, creating losses for the funds and institutions invested in them. These losses were enough to create stability problems for some large financial institutions, and create panic in ordinary investors when the mortgage news reached them. The result was a massive sell-off of assets, losses for companies, and concerns about the entire financial system.