Making Sense of the Sub-Prime Housing Market
NEW YORK, March 17, 2007 — -- It was another rollercoaster week for the stock market, and many analysts are blaming the continuing turbulence on the sub-prime mortgage market.
Sub-prime lenders have been in the headlines a lot this week, but it can be difficult to understand exactly who they are, and why they have caused such fallout on Wall Street.
Sub-prime lenders are companies that provide loans to home buyers who either don't have good credit histories or, because of their income, are considered riskier candidates for loans.
These are home buyers who, in the past, might not have been able to get a mortgage loan. But as part of the housing boom over the last several years, the requirements for borrowers lessened, and more and more houses were sold to sub-prime buyers.
Buyers in the sub-prime mortgage market were often enticed by Adjustable Rate Mortgages that offered lower monthly payments to start. Some of these mortgages are known as 2/28's, where the first two years have a low monthly payment, and then the payments adjust for the remainder of the loan.
After the period of low monthly payments expires, monthly payments can spike much higher even than what a prime homebuyer would be paying -- to make up for the poor credit history of the sub-prime buyer.
Often, the sub-prime home buyer would try to refinance their mortgage to continue their low monthly payment, and would continue to try to refinance each time the lower rate expired. As a result of refinancing, many homeowners got trapped in their loans.
Because the value of houses in some areas of the country has been decreasing, sub-prime borrowers are having a tougher time keeping their low payments. When the value of their home is less than what they purchased it for, the loan becomes worth more than the house. The borrower now has a monthly payment that they simply cannot afford. As a result, many sub-prime borrowers are going into foreclosure.
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