Sub Prime Mortgages

 Sub Prime Mortgages

Sub primes mortgages are adjustable rates that carry higher interest rates and less favorable terms compared to traditional mortgages. According to Geraldi (2010), sub prime mortgages are given to creditors with poor records. This concept started in the mid of 1990s to address the issue of borrowers with unfavorable credit histories and scores to get finances for home ownership. Many borrowers were provided with the so-called “creative” funding by the lenders due the popularity of this type of mortgage. Sub prime lenders required no proof of income to borrowers for them to write the loans. They charged no interest or low interest for several years before adjusting to a much high rate later. However, this type of mortgage collapsed in late 2006 due to the economic turmoil in the housing and lending market.

According to many people, this period was indeed a recession in the U.S. economy Mayer & Pence, 2008). The sub prime mortgage problem started in the mid of 1990s just as immediately as it got its roots into the market. It all happened when the mortgage lenders reduced the already existing strict financial qualifications needed to get a mortgage in quest for house ownership. This was by offering household mortgage loans   at higher interest rates to compensate for the big risks. The mortgages had no down payments, only the interests. More risk was introduced in the system due to many mortgage lenders becoming reluctant on their underwriting standards, leading to mortgage problems. Some of these problems are fraud and misrepresentation, defaults, and deregulation

Fraud and misrepresentation

Some of the borrowers did not have qualifications on loan borrowing , and so some sub prime mortgage lenders had to create fraudulent documents or  the situation of the borrower be misrepresented to have the underwriter approve the mortgages Mayer & Pence, 2008).

Defaults

The sub prime mortgage market had an increased number of defaulters by the year 2006. This was due to mortgage-backed securities sold to investors hence the problem spread into the national and international financial markets. This was simply because the problem could not be retained by sub prime market Mayer & Pence, 2008).

Deregulation

            Lack of regulatory measures as required led to the collapse of the sub prime mortgage market. Other than the regulations that should be followed by the mortgage industry; the Congress and the Presidential Administration believe that more federal and state regulations are required so that fraud and misrepresentation on the part of mortgage professions or borrowers in the sub prime market are minimized (Mayer & Pence, 2008).

Effects and misconceptions

Since the mortgage rates were adjustable then they were seen to increase dramatically leading to mortgage payments go up by more than double the original payment. This led to some borrowers to a state of not being able to make the loan payments hence losing their homes to foreclosures. The increase in foreclosures worried the lenders in the lending business and so getting a home after early 2008 was difficult especially for those restricted to shopping in the sub prime market only (Gramlick, 2007). Many blames are laid in the sub prime mortgage market for leading to a near collapse of the U.S economy in 2006 after the burst of the housing bubble. It should however not be assumed that all borrowers with sub prime mortgage have low credit worthiness and were not able to make substantial down payments.

 References

Geraldi, K. S. (2010). Subprime Mortgages, Foreclosures, and Urban Neighborhoods. New York: Diane publishers.

Gramlick, E. M. (2007). Subprime Mortgages: Americas latest boom and bust. Washington DC: The urban institute.

Mayer, C. J., & Pence, K. M. (2008). Subprime Mortgages. Washington: National Bureau of Economic Research.

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