Sub prime Loans were intended to allow borrowers with weak credit records the benefits of owning a home. However, you always have to look out for predatory business practices. They exist in every industry and bloom in boom times. A typical predatory mortgage is a refinancing of an existing loan that is packed with excess or unnecessary fees and provides no tangible benefit to the borrower. Unfortunately, many of these loans are perfectly legal.
Many of the loans entered into required no documentation of income or accepted very low incoming with teaser rates that ballooned down the road. the selling point was that the new owner could re-fi later at a lower interest rate and that that way get in, even though not qualified.
Here are some astounding numbers
- Proportion of sub prime mortgages made from 2004 to 2006 that come with "exploding" adjustable interest rates: 89-93%
- Proportion approved without fully documented income: 43-50%
- Proportion with no escrow for taxes and insurance: 75%
- Percentage increase of interest rate on an "exploding" ARM resetting to 12% from 7%: 70%
- Typical increase in monthly payment (3rd yr): 30% to 50%
- Number of sub prime mortgages set for an interest-rate reset in 2007 and 2008: 1.8 million
- Valued at: $ 450 billion
- Year-over-year increase in foreclosure filings on sub prime loans with adjustable rates (2nd quarter 2006 to 2007): 90%
- Increase in foreclosure files on prime fixed-rate loans during the same period: 23%
How we will all pay in the form of higher rates and tighter credit requirements, job growth in the industry and taxes loss to our cities and states. You have to ask yourself, where were the watchdogs? If you are looking for good articles on how to shop for a mortgage or refi, here is a good article entitled Shopping for the Best Mortgage
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