The news media sure does love talking about the "subprime mortgage mess."
But it seems some of the talking heads don't really know what they are talking about.
There are a few things going on in the mortgage mess. Here's part of the story:
1. Subprime. Subprime borrowers are people that had credit scores and/or debt to income ratios that were less than would qualify them for mortgage programs and rates that people with average to good credit would get. Most of the subprime borrowers got into morgages with tough terms, some had adjustable rates, and some of the borrowers were given more mortgage than they could actually afford. Some of these borrowers did not have enough money to pay the first payment.
2. Adjustable rates. Many homeowners, some of them subprime and some of them good credit borrowers, took advantage of the very low teaser rates that the Adjustable Rate Mortgages offered. These mortgages all have different rules on how and when the rates adjust up, but the monthly payment difference from the first cheap payment to the subsequent adjusted payments are usually pretty steep. Lots of borrowers assumed that property values would continue to increase, and they would be able to refinance out of the now-adjusted loan. However, some ARM borrowers bought at the height of the market, and the house is not worth what they paid for it, making it impossible to refinance.
Both of these scenarios have lead to the foreclosure mess. It is not just subprime borrowers getting foreclosed, but lots of people. Of course, those people that are most economically vunerable are the most affected. I am seeing foreclosures in virtually every neighborhood, in the city, in the suburbs, in the gated communities.
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Absolutely. When I bought my house, it was definitely NOT explained how bad things could get, and I only found out that I had an ARM by accident, when I asked specific questions. I'm college educated, with a Master's degree... how could I be so uninformed? Well, a guy can't know everything about everything, that's why we pay experts. I don't know everything there is to know about roofing, so I hire a professional roofer, for instance, and the roofer can walk me through all the different options (a tear-off, just layer on more shingles, etc.) I was horribly uninformed when I bought the house, both through my research and through my broker. Luckily, my friend, a financial guy, strongly later encouraged me to refinance, and I did so, before the crap hit the fan. Whew!!! That's the problem when the profit motive is driving professions like mortgage brokers...they are getting the best deal for themselves, not the best deal for the client. Yeesh...
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