A "subprime" home loan is a loan where the client has some significant credit issues, or was otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be quite risky for the lender...they also bear higher interest rates to match, as well as often being adjustable rates that likely have recently hiked sky high, not to mention the steep prepayment penalties they generally carry.
These loans have been around for years - so why all the drama now?
Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher - and the payment right along with it - the homeowners are finding that they are unable to keep up with the dramatic increase in payment.
In the past, homeowners in this situation would simply throw the house on the market, realize enough of a profit to cover any prepayment penalties, and literally move on. But the soft real estate market isn't making this quite so easy any more - houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.
So the subprime homeowner is stuck - and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many subprime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.
How does this impact you?
Read about it in my complimentary weekly market update by clicking on the green MMG Banner on the right.
