Please explain, in simple terms, this Subprime fiasco that is in the news lately.?

Question

I understand that many people cannot make mortgage payments because they did not understand that payment amounts could sky rocket with passage of time. But what causes several mortgage companies into financial spin because of that, and what is meant by 'subprime' in relation to that?

Answer 1

This is the fault of both the greedy mortgage companies who wanted to increase their bottom line and the greedy customers who thought they could flip their homes before their mortgages adjusted and make a profit.

To have qualified for most of these loans the customers would had to lie about their incomes and the mortgage companies did not make them prove it. Shame on both of them.

Also a lot of customers bought trade lines to increase their credit score so they could be approved for loans that they really were not qualified for. This is why FICO is changing the way credit scores are calculated next month so this will not happen in the future.

Add this to the sagging housing market and people found that they could not sell their homes like they thought they were going to be able to and their rate adjusts up and bingo they cant make their payments and lose their homes in foreclosure.

Were the mortgage companies wrong? Sure they were. But so were the customers who gambled with money they could not afford to lose so I don't feel sorry for any of them.

Answer 2

Some mortgage companies specialize in subprime mortgages. They're in a spin because of the number of loans going bad.

What happened was people who really could not afford to buy a home were given creative financing -- some of which was really fantasy. The worse offenders being interest only loans (not just one but two) with negative amortization -- 4% interest rate the first 3 years with the 6% interest balance being tacked onto the loan.

The interest rate adjusts and the payment goes way up. The people can't make the payment and the house is worth less than the mortgage.

Answer 3

Subprime loans are given to those people who have bad credit, or cannot prove their income, or their debt to income ratio is high. Prime loans are given to those with good credit and documented income and who are financially sound. What happened to a lot of people is they got in their homes using subprime ARM loans, adjustable rate mortages, believing that they could refinance at a later date. ARMs start out with a decent if not low interest rate and then go up usually in 2, 3 or 5 years. Many found that the timeframe for their ARM was simply too short for them to correct their credit problems and so they couldn't obtain another/better loan. When their interest rates skyrocketed, their payments become unmanageable causing foreclosures. There were many mortgage companies giving out loans to people who really shouldn't have been able to get loans. The reason mortgage companies are feeling the backlash now is because their funding dried up (they do have to get their money from somewhere) -- they can no longer fund loans because of their past practices. I would also imagine that they had some type of financial penalties applied to them as well. Also, if they were a direct lender (loaning their own money), then imagine how much they've lost with all the foreclosures -- that would be a direct hit to their pocketbooks. I believe it is only the mortgage companies who consistently funded bad loans who have been hit so hard as to go out of business.

Answer 4

"Subprime" is a term used by money lenders to describe loans that are made to folks with bad or questionable credit scores and histories. They are risky for both parties, the lender and the person taking the loan, because the entity loaning the money is taking a higher risk and translates this higher risk into higher rates and stricter conditions which affect the person taking the loan and translates into them having a harder time making payments. If the person can't make the payments or falls back on them, the lender is not making the money it assumed it would. When lending companies don't make the revenues they should, their shares fall on the market. Lending companies then have to take measures to survive, such as firing people and downsizing.

Now when the person who has taken a loan falls behind enough it leads to foreclosure and lenders have to sell the properties at low prices just to recouperate their losses. If you have many foreclosures, it will affect the price of housing in general and instead of gaining on their investments, home owners see the values of their homes drop dramatically. With a home that is valued at less, you can borrow less.

Because rates have increased so much, many people were not able to make payments, particularly people with subprime loans, who already had a high rate. It is worse if many people get into loans with conditions they do not understand and when you have a puzzlingly lax regulated industry tricking folks into cut-throat conditions and behaving unethically. This all leads to the industry meltdown you see now.

Answer 5

it is companies, giving out mortgages to people who have bad credit, the companies caused the problem to give out
mortgages, the companies could have said no, plus instead
of causing a fiasco and made the payments affordable for
the individuals they would not be "crying" at the moment.
The Companies got caught up in their own greed, the can
solve it by lowering the interest so that these people would
not lose their homes and they can still make money profitablely. They are just greedy and taking advantage
They don't have to give out subprime mortagages, they
choose to.