Upside Down Mortgage

Subprime Mortgage Crisis Explained

Question: Subprime Mortgage Crisis?

Okay so I'm writing my term paper and I have a quick question...so people began buying these subprime mortgages because they were being offered at low interest rates and loose credit requirements but why did so many people have to file bankruptcy or forclose? Please explain this to me...I pick best answer!

Answer: I'm buying a house now that was foreclosed, so here's the deal:
a couple of years ago some people decided they wanted to buy a house because everybody said that pretty soon only the rich people would be able to afford a house anymore, or probably because they thought they could make a ton of money on it.
So they found this house for 300 thousand dollars.
A standard loan on 300K would mean that they would have to put 20% down, but that's $60,000 and the payments would be about $1800 because these people didn't have very good credit so they couldn't get a good interest rate. This was way more than they could afford.
So along came a "subprime lender"... which is a scum sucking creature that told them... no problem. We can give you a loan for the entire amount, no downpayment needed, because we know that your house will be worth more than 300k in a couple of years so you could always sell it if you wanted. The deal is you get to buy this ARM (adjustable rate mortgage) which means we will give you a really low interest rate for a couple of years, and then we jack it up big time to make up for the difference.
The idea is that they would sell the house before the interest rate reset on this ARM. (usually 2-5 years).
So they got into their house paying only 1000/month, with no downpayment.
Now after a couple of years there were a whole bunch of these people that needed to sell their house before their ARMs reset and all of the sudden everybody wants to sell their house, and when there is more supply than demand, then house prices go down.
Now the people with ARMs couldn't sell their houses for more than what they owed on them so they could get out of the deal before the interest rates reset.
So all of the sudden the interest rate jumps up and instead of their 1000/month mortgage, they have to pay 2000, and home prices dropped so low that people owed a lot more than the houses are worth.
So they quit paying their mortgage because they felt like they're throwing their money away. They're putting twice as much money per month into a house that is worth half as much.
So then the bank kicks them out and takes their house away and tries to sell it to recoup some of their losses.
That's where I come in: I get the same house for 180,000 and because I'm not stupid, I get a conventional loan and my payments are around 1300 and are fixed (which means I don't have to worry about them ever going up). And I got a decent interest rate because my credit was decent.
the moral of the story:
patience pays off.

Subprime mortgage crisis explained

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