The mortgage industry is reeling as a growing number of homeowners with subprime loans -- those with high interest rates and fees offered to high-risk borrowers -- can't make their payments. Some homeowners face the prospect of losing their homes. Dozens of mortgage companies have gone under, and more have laid off workers to stem financial losses.
The turmoil has rattled the stock market and led to calls in Congress for national regulation of mortgage lenders. A reaction by Congress and regulators -- which some fear could become an overreaction -- could make it harder for consumers with blemished credit histories to qualify for home loans.
Nationwide, slightly less than 12 percent of subprime mortgages (excluding second mortgages) were 60 days late and considered in danger of default.
Now that subprimes account for about $1.3 trillion of the nation's $10 trillion in outstanding mortgage debt, analysts and policy makers are wondering what would happen if even 10 percent of the subprime loans go delinquent.
So what is Subprime lending anyways?
Subprime lending began more than two decades ago as a way to increase home ownership.
Poor credit scores that had kept some people out of the housing market aren't necessarily the result of financial recklessness on the part of borrowers. A divorce, medical problems or sudden job loss can cause financial stress that shows up as a low credit score. They would not be eligible for traditional financing, but they're still good, responsible people.
While subprime loans vary, they often charge higher interest rates, fees and prepayment penalties than conventional mortgage products.
The higher rates beg the question of whether home buyers who don't qualify for conventional loans should be buying at all. Subprimes can be useful for people who have unusual circumstances but that is very few in the big picture.
As much as I am an advocate to home ownership – it should not come at any price. Sometimes they need to wait and get their finances in order to get a reasonable loan. It will pay off in the long term
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