Mortgage loan companies recently started originating subprime loans again, which could be a sign that the economy has not fully recovered. During the financial crisis of the 21st century, millions lost their homes to foreclosure and this was largely blamed on lenders that extended credit to borrowers with poor credit and high debt-to-income ratios in the form of the subprime mortgage loan. In recent years few have spoken of the “toxic” loans that led to the recession, but they are making a comeback.
People fear these mortgage loans will cause yet another crisis, and with the economy still recovering, they fear the economic fallout could be far worse. “The economy has only recently gotten a little better and still millions are out of work,” said one man who is not alone in this sentiment. A woman in her early 30s shared a disparaging story about her difficulty finding a job after graduating from college with a degree in finance from a reputable university.
The media often talks about the vast number of Millenials, educated individuals who are in their late 20s or early 30s, who live at home with their parents, as they cannot find adequate jobs to support living on their own. The job market has finally started picking up a bit and these people are looking for homes. A large number of those looking for homes have little credit and numerous others have poor credit as a result of the difficult times they endured in recent years.
Home mortgage loan companies are rushing in to save the day by offering a “second chance.” They believe they are providing an opportunity for individuals with blemished credit to clear it up, a way to start over all while buying into the American dream of becoming a home owner. Subprime or “nonprime” loans as a handful of lenders are calling them, are the lender’s answer to the problem, but they are also what people believe caused the problem in the first place when the millions of Americans who lost their homes made the entire situation infinitely worse.
However, people are wondering why lenders would even consider subprime loans a viable option for individuals with little or no credit and those with less than perfect credit. Subprime loans are offered by mortgage companies to borrowers that do not qualify for a prime loan and they require borrowers to pay significantly higher interest rates or borrow money with less than ideal loan terms in the hope that borrowers can bring their credit back to where it should be. One of the loan types used for subprime loans is the adjustable rate mortgage loan or an ARM loan.
ARM loans were a major contributor to the trouble in the housing market, as lenders offered borrowers low teaser rates to entice them, which later rose leading to astronomical house payments that borrowers could not afford. The stories told by homeowners are often the same. They took out a loan to buy a first home or a dream home and thought life was wonderful as they enjoyed the fruits of their labor. Only too soon did those first-time homeowners have the rug pulled out from under them when they received notice that their house payment had increased by double, triple, or quadruple the amount of the borrowers original monthly payment.
Consequently, homeowners all over the country began losing their homes by the millions. Seeing countless homes in foreclosure became common in neighborhoods across the United States. Banks were holding back the foreclosures in an effort to prevent the housing market from plunging further into the depths of recession and the home prices from falling.
Recently, regulations have been put in place to prevent another economic crisis like the one that occurred less than ten years ago. Whether or not those regulations will prevent history from repeating itself is yet to be seen. However, as long as there are subprime lenders willing to loan money, there will be subprime borrowers who will borrow it, even if that means paying outrageous interest rates and astronomical fees. Hopefully, the regulations put in place are enough to prevent another financial crisis in the wake of a surge of subprime loans, as mortgage loan companies bring them back.
By Amy Gilmore