Effects of Subprime Lending
The effects of subprime lending are many. In some instances subprime
lending is a good thing because it gives people with past credit
issues a second chance. Other times, it puts people into situations
where they will not be able to afford the loan.
The effects of subprime lending have reached deep into the American
economy. Although subprime lending has been around for many years,
it is only recently that it has made headlines. If you believe everything
that you read and hear in the media about subprime
mortgages, you would think that they are the root of all evil.
The subprime lending market was never designed to use as a way to
get into real estate with no money down or with liar loans (loans
that do not verify income) or to use as a vehicle to get into a
very volatile real estate market. The subprime market was supposed
to be there to give responsible people a second chance at owning
a home or car.
The effects of subprime lending used irresponsibly are clearly
seen in every real estate
market in the US. The situation is so bad, that if you bought
a home within the last couple of years and have to pay PMI (private
mortgage insurance) you can deduct that off of your taxes. Usually
you must have PMI if you have less than a 20% down payment on a
home purchase. PMI is an additional cost and it is in addition to
homeowners insurance that is required. PMI guarantees the lender
will get the amount of the mortgage if you default on the loan.
Many people are defaulting
on their subprime loans. There are many reasons for this. The
first is that some people bought homes they could not afford. At
one point, if you had an adjustable rate mortgage (ARM) you had
to qualify at the initial rate and two upward rate adjustments as
well. Recently this was not the case.
Those that qualified for the loan at the introductory "teaser
rate" did not have to qualify for the loan at the rate of the
second adjustment. This set up a very bad situation as many who
could afford the initial low rate, are now in a lot of trouble because
the rates have risen several percentage points and some have seen
their mortgage payment almost double. When you combine that with
higher food, commutation, and astronomical gas prices, you have
a recipe for disaster.
Other individuals are in trouble because they took advantage of
easy to obtain subprime loans to get into the real estate market
when they knew very little about real estate and property management.
Not too long ago, in some areas of the US you could purchase a home,
fix a few cosmetic flaws and resell it quickly for several thousands
of dollars in profit. The term flipping was coined to describe what
many were doing. It means to buy a piece of real estate and "flip
it" or sell it quickly for a profit.
This drove real estate prices to artificial and unsustainable highs.
When these highs or bubbles crashed and prices started to drop sharply,
many inexperienced people got caught holding onto property the never
intended to keep. Now those properties are worth less than the mortgages
on them and this is having a further snowball effect on the high
foreclosure rate. It is easier to let a property go into foreclosure
if you are not living there. Foreclosure
sales further reduce property values and you have a cycle forming
that is difficult to break.
These are the effects of subprime lending. When used for a second
chance for home ownership and credit it can be a wonderful thing.
If used for leverage to get novices into a volatile real estate
market, the effects can be disastrous.
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