Subprime lending has definitely been one of the hottest topics in the news lately. All of the coverage that this crisis has gotten lately has caused confusion over what it all means and how it will affect the average homeowner. We hope that the questions and answers that we have compiled will help alleviate some of this confusion.
What is Subprime lending?
Subprime lending, also called "B-Paper," "near-prime," or "second chance" lending, is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history. A subprime loan is one that is offered at a rate well above the prime rate, which is a benchmark that banks set for establishing interest rates for other loans.
Why is it such a hot topic in the news lately?
There has been a lot of bad buzz going on about subprime lending lately because there has been large movement, mostly down, as the stock market reacts to a large number of foreclosures on homes in the so-called "subprime" mortgage area. A large amount of these subprime loans are going into default and, the companies that made these loans are in real trouble.
Why are so many of these loans going into default?
Subprime lending was all well and good in the low interest rate environment we've enjoyed for a long time, but as interest rates have come up over the past few years, these shaky buyers have been increasingly unable to make their mortgage payments and going into default.
In the last 5-10 years, many people with not so great credit histories, low incomes, and low credit scores were approved to borrow money to buy houses because banks lowered their normal guidelines. These borrowers became "subprime" credit risks. The banks used different types of lending methods like adjustable rate mortgages, interest-only mortgages, and other kinds of financing to get these people into homes.
How does this affect you?
You really will not be affected directly by the subprime crisis if you already own a home and have a standard 30-year fixed mortgage. If there is an increase in foreclosures in your neighborhood, you may see your home's value drop some. If you are not planning to sell your home any time soon, you should be able to get through the dip in your home's value.
Unfortunately, if you are buying a home but do not have a down payment or have a credit score that is below 620 you will find it more difficult to obtain financing to purchase a home. Many lenders are either getting stricter on their approval requirements or getting out of the subprime business as a whole.
On a positive note, if you are looking to buy a home, the subprime problems may benefit you. Now that there is some uncertainty in the real estate market, homes are selling for lower prices and there are more homes out there for sale. You get more options for lower prices. At this point, rates are still low, so if you have good credit, you will be in a good position.
-- L. Morse
Labels: crisis, default, foreclosure, lending, mortgages, Subprime
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