The real estate crisis in the US started off with the sub prime mortgage crisis since 1982. The sub prime mortgage crisis, better known as “mortgage mess” came to the attention of the public when there was a steeping rise in the rates of foreclosure in the year 2006 that spiraled out of control in the year 2007. This real estate crisis triggered the global housing market within the same year. People had to refinance home mortgage loans at a greater extent and as the consumer spending rose, foreclosure rates went through a sharp upsurge, the stock market also crashed due to the same reason. Read on to know the causes and consequences of the sub prime mortgage crisis.
3 Causes of the sub prime mortgage crisis
The real estate experts have researched and come up with various reasons that caused the sub prime mortgage crisis. Have a look at some of them.
1. The sub prime mortgages: The increase in the number of sub prime borrowers, are the biggest reason for this kind of meltdown. The borrowers who have a very poor credit score are called sub prime borrowers and these are the borrowers who are mostly going to default on loans. The lenders charge higher interest rates and this is the reason why most borrowers can’t even arrange the monthly payments.
2. The adjustable rate mortgage: The ARMs became very famous home loans during this period. Most borrowers took out an adjustable rate mortgage apparently getting tempted by the initial low interest rates. It was totally unknown to them that the interest rates will increase after a certain period. This increased the risk of the home loan lenders.
3. Mortgage backed securities: With mortgage backed securities, lenders could bundle loans into a single package and resell them. With the invention of interest only loans, the lenders were left at a higher risk with an increasing number of people defaulting on the loans after the interest rate hike.
2 Consequences of the sub prime mortgage crisis
Just as many factors have led to the sub prime mortgage crisis, there are many consequences of the sub prime mortgage meltdown. Check out some of them.
1. Credit got tighter: As the interest rates went through a steep hike, money just got more difficult and tough to borrow. The restrictions on borrowing a home loan got more rigid. Now one has to have very good credit score to get a mortgage deal approved. The terms and conditions for refinance home mortgage loans also became stringent.
2. Purchasing a house became tougher: With the low real estate rates, you might not feel excited as the terms for borrowing money to finance your purchase has got stricter. Stated income loans have now become extinct. One has to show serious documentation of one’s proof of income in order to qualify for a loan.
Though the sub prime mortgage crisis has withered away and there are no sub prime mortgages nowadays, the US housing market is still to recover. With the low mortgage rates, more and more struggling homeowners are opting for refinance home mortgage loans to pay off their home loans in affordable monthly payments.
(Thanks Peter Gomes for this Guest Post)