The mortgage crisis was triggered by customers who may have been late on credit card payments, maybe even filed bankruptcy in the previous years, but still hoped to own a dream home of their own. Their cause was helped by lenders ready to oblige in order to exploit new markets so they could increase their profits. Seeing a market flush with opportunities, hedge funds and banks worldwide went on buying mortgage-backed securities to bolster their own bottom lines.
Why should I be aware of this?
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Buying a house on mortgage means loans that could be paid off in 14 or 15 years being stretched to around 30 years, with thousands of extra dollars going to a mortgage company. Subprime loans interest rates go upwards and upwards until the homeowner cannot afford the payment anymore then becomes behind on the mortgage.
It is possible to buy a house even if your debt to income ratio is too high and you don’t have any savings by getting a sub-prime loan. You may be able to repay the loan for a while. But in the unfortunate event of your getting laid off, hurt or losing your job for any reason you will no longer be able to pay off your mortgage.
We must be aware that most of the mortgaged homes which have gone for foreclosure were grossly overvalued. As a result, a number of home owners with subprime mortgages were stuck both ways. They were neither able to combat the increases in payment nor sell their homes by reason of price depreciation in the market.
All about mortgage crisis
Millions of homeowners have faced foreclosure since 2006, sending shockwaves through the US financial system as banks were forced to write down billions of dollars worth of mortgage-backed securities.
The downturn in the US housing market provided the spark for the global credit crisis and severely curbed banks' ability to offer new loans.
What brought about the crisis?
There are many factors which brought about the mortgage crisis. Primary cause is that people were buying homes they could not afford. Some borrowers bought homes with stated income loans; which meant the borrower did not need to verify his or her income.
Competition between mortgage finance companies and traditional banks prompted the former to offer some new products, including several mortgage products and choices, such as subprime loans of different varieties.
Large subprime mortgages
A number of home owners with subprime mortgages were neither able to combat the increases in payment nor sell their homes by reason of price depreciation in the market. In the US there is an estimated 1 trillion dollars of sub-prime mortgages, indicating that many are buying more expensive houses than they can afford.
People were buying homes in which they could not afford. They may have been offered a low introductory rate with an adjustable rate. Many were under the impression that they could refinance in a year or two with no problem and settle into a fixed rate. The current economic problem, which resulted in loss of jobs, added to the crisis.
Prime market crisis
There is also a rise in prime delinquencies, which though less severe than the one in the subprime market, still poses a threat to the battered housing market and weakening economy.
This is because many prime loans in recent years allowed borrowers to pay less initially and face higher adjustable payments a few years later. The borrowers were able to refinance their loans and even sell their property to pay off them mortgage as long as home prices were rising. But with falling prices creditworthy homeowners too are starting to come under the same financial stress as those with subprime credit.
Prime borrowers, unlike sub-prime borrowers have greater means to restructure their debt if they lose jobs or encounter other financial challenges.
What can I do about it?
If sky high interest rates is ruining your chances of having your dream home, it is possible for you to take advantage of the political pressure being applied to banks and mortgage lenders to accept loan modifications and help keep home owners in their homes. Loan modification means renegotiating new terms with the lenders.
You will be eligible for a loan modification in case of the following:
- Missed payments are forgiven or moved to back end of the loan.
- Monthly payment is reduced to fit your ability to pay.
- High interest rate is reduced to create an affordable payment.
- Adjustable rate is converted to lower fixed-rate loan.
- Lender may forgive part of loan balance to match your home's value.
- Foreclosure process is stopped and lender modifies loan terms!
- Negative amortization loans are converted to non-negative, low, fixed rate loan.
It is better to take the help of a loan modification attorney to handle your case.
- How the mortgage crisis arose
- Where to Find Help in a Mortgage Crisis
- US Subprime Mortgage Crisis
- Mortgage Crisis Spreads Past Subprime Loans