Friday, October 24, 2008

Sub Prime Mortgages, What are they good for.

One of the key things killing this economy is the sub prime mortgages put into securities that come out of our secondary mortgage industry. So what is a sub prime mortgage and why do people want them and why would a mortgage company deal with them.

A sub prime mortgage is a mortgage that has low payments in the first 3 to 5 year but over time the interest rate rises to much higher than the prime interest rate and the loan payments become much higher after 5 years. so why would a person commit to a 20 to 40 year loan knowing that payments will climb over time so that they can not afford it. They do that because their credit rating is bad and the mortgage rate they would normally get would keep them from getting the house they love. So they take this loan to build their credit rating and in 3 to 5 years they refinance their house with their brand new clean credit rating. The intent of sub prime mortgages is for people with low income and poor credit to prove them selves.

so if the loan is much more likely to become default why would a company give the mortgage. Because they believe the value of the house will definitely climb. So if the loan must be foreclosed on in 3 to 5 years then the house will have gone up and therefore they will get their money back and possibly more because the value of the house has gone up. That was certainly true during the housing bubble but now that the bubble has burst, those sub prime mortgages are very scary problems. And that is one of the contributing factors. we have no idea when the house situation will even out and people can figure out what the actual value of those sub prime mortgages are. because if they get foreclosed on, people could lose their shirts on those houses because a foreclosed house is difficult to sell for profit in a bad housing market.

Next time you see Bill Clinton and a Democratic member of the house or Senate be sure and thank them for the 1999 legislation and the 2004 legislation that allowed Fannie Mae and Freddie Mac to include sub prime mortgages in their quotas for low income housing mortgages purchased and for helping them put those mortgages in our securities.

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