Upside Down Mortgage

Subprime Mortgages

Question: What does it mean to default on a mortgage? what are subprime mortgages and how do the two relate?

Who are the people that are defaulting on their mortgages? which companies (industries) are involved in this?
Additionally does this go on in some regions more than in others?
what effects does it have on the economy and our daily lives?
what can be done to prevent further morgage defaults and fix the tumbling economy?
what shouldve been done earlier for this crisis to never have started?
what will happen if this problem isn't fixed in the long run?

Answer: Defaulting on a mortgage means you do not pay the mortgage for which you are a borrower.

Sub-prime mortgages are to borrowers that do not qualify for a "prime" mortgage due to poor credit (this can either be a lack of a credit history or poor credit history).

All groups are defaulting on mortgages; however, sub-prime borrowers make up a significant percentage of these, especially those who took out Adjustable Rate Mortgages (ARMs) over the past few years. Many of these mortgages reset earlier this year when rates were higher, resulting in substantial increases in monthly mortgage payments. Often increasing beyond the borrowers' means.

This is occurring across the country, but most predominately in places like Florida, Nevada, and California.

As for the effect on the economy, this is having a big impact. It is resulting in higher foreclosures, which is resulting in negative pressures on home prices. It has caused a tightening in the mortgage markets, with mortgages currently more difficult to obtain and the more "exotic" type mortgages are nearly impossible, and the markets have been impacted as investors are concerned about bank losses and the availability of money. The impacts are quite numerous, but those are some examples.

Underwriting standards need to remain tight. ARMs need to continue to be underwritten based on the borrowers' ability to pay, AFTER pricing adjustements. As for the economy, the Feds will need to continue to balance growth with inflation. This will be difficult due to rising energy costs which are driving up prices, while at the same time placing downward pressure on growth (much like stagflation in the 1970s when growth was slow but inflation was high).

The underwriting of mortgages should have been much more strict the whole time. People got too carried away with 100+% finanacing, ARMs, and I/O loans.

In the long run, if not fixed, foreclosures will continue to rise and the residential market will bring the economy into a recession.

Good luck with the rest of your homework.

First Look With Katie Couric: Subprime Mortgages

If you're new around here, you might want to subscribe to our Upside-Down Mortgage RSS feed. It's quite likely the only feed of it's type on the internet!