The title might be a mouthful, but “subprime mortgage crisis” is probably a familiar phrase if you’ve been reading the papers—or even just scanning the headlines on your way past the newsstand.
What are Subprime
Mortgages?
Subprime mortgages are home loans made to people who have a higher likelihood of defaulting on their payments and foreclosing on their homes.
Sometimes this happens because a financial institution makes a bad judgment call-- lending to would-be homeowners who have a poor credit history or an inadequate income for the purchase they’re making. Other times, the fault lies in misleading or confusing advertisements by predatory lenders. Low introductory interest rates on ARMs (Adjustable Rate Mortgages) create another problem. In these cases, people can afford the lower initial interest rate, but are unable to make their payments when interest rates increase later on.
ARMs are one of the reasons for the current glut of subprime mortgages and large number of foreclosures.
How are Subprime Mortgages and Foreclosures Related?
Foreclosure is the end result of an unpaid subprime mortgage.
When a homeowner cannot or will not make their mortgage payments, the bank or lender has the right to force that person to sell their home. The money from the sale of that home is then used to pay off the unmet home loan or mortgage. You can think of it as a kind of “insurance” for the financial institution that gave you the loan in the first place.
Imagine eating at a cash-only restaurant, only to realize that you don’t have a dime on you. You might leave your wallet with a waiter while you run to the ATM. And while waiter doesn’t necessarily want your wallet, they will keep it as insurance that you will return with money to pay for your meal. A mortgage works the same way. And a foreclosure means that if you don’t return, or you default on your payment, the waiter will keep your wallet and the bank will keep your home.
If you’re a more visual person, you can also check out this graphical representation of the subprime mortgage crisis from the New York Times.
Learn more about subprime mortgages and avoiding foreclosures at our LegalMatch law library, or by visiting the Real Estate and Property Law Forum at the LegalCenter.
By Kate Beall
