Subprime Mortgage Crisis
The impact of the subprime mortgage crisis will affect lenders, borrowers, investors, and consumers. To keep up with the competition lenders allowed buyers to purchase homes who had lower credit scores. These loans are known as subprime and may have been processed with no proof of income and no down payment. However, they were largely based upon variable interest rates making them very attractive to buyers. The initial monthly payments were low but rose as interest rates went up to the point that many of these same buyers can not afford current payments. The subprime mortgage crisis is based upon the probability that most of these buyers will suffer foreclosures on their homes. This threat has caused lenders to stop lending and investors to stop investing. Consumer spending will also be affected because of the high mortgage payments that many of them are trying to make.
A credit crunch could occur because of the threat to the lending industry as foreclosures grow into multitudes. The subprime mortgage crisis has caused banks and other financial institutions to stop lending or at least to limit that lending. This has happened because of their fear that investors won't be investing money into the lending industry. This will not only affect mortgages but it is likely to affect commercial loans, industrial loans, and revolving credit. There will be a stream of available homes on the market due to the foreclosures but not many buyers which will cause an imbalance between supply and demand. In addition, the value of homes will decline thus making it difficult for homeowners to sell.
Homeowners who have difficulty selling are bound to decrease spending. Significant decreases in consumer spending will affect the economy. The impact of the subprime mortgage crisis on consumer spending could lead to a recession. The decrease in spending will also cause uncertainty in investment markets so buying and selling will decrease. With fewer investments it will be hard for lenders to find backers to finance loans. The only loans that will be made are ones that lenders have confidence in with creditworthy customers. This will make it extremely difficulty for the average person to borrow money which will also cause a decrease in consumer spending. The decrease of investments will affect the flow of capital in the economy both nationally and globally.
If the Federal Reserve lowers interest rates the economy might receive enough stimulation to thwart the upcoming threat of recession. The subprime mortgage crisis might not be as detrimental if banks would work with consumers to allow them to stay in their homes instead of losing them to foreclosure. Lenders could allow homeowners to refinance their homes with a lower interest rate which would result in lower monthly payments. Losing interest money would be better than having homeowners default on loans completely. Homeowners who seem to be less than creditworthy might surprise lenders if they were not subject to such high interest and other types of fees. Generally people want to do better but when they are given a chance to do better it often comes with a high price. On the flip side, some people may need to learn to have integrity when making an agreement with a creditor and should sincerely try to follow through instead of defaulting on loans. "Let integrity and uprightness preserve me; for I wait on Thee" (Psalm 25:21).
The decline of housing prices is not the only sign that a recession may be taking place. Other indicators may include stock market crash, businesses stop expanding, and unemployment rises. The impact of the subprime mortgage crisis can affect wealth, retirement savings, stock prices, and home equity. One way that a recession can be detrimental to individuals is if the recession becomes so bad that employers layoff workers. The decline of housing prices will cause a decline in building which will mean fewer construction jobs. However, the largest percentage of the economy is based upon consumer spending. So as consumer spending declines reductions in income will result which will lead to even less spending.
Homeowners who find themselves in a declining situation soon to undergo foreclosure on their home should talk to their mortgage company or bank and find out if there are any options available to help. Loan counselors should be able to answer questions about any new programs out there that may be able to help a homeowner keep their home. The subprime mortgage crisis may lead to programs or refinancing for those who need it. Doing a search on the Internet may also provide some information that might be helpful.
A potential buyer should beware of lenders who target consumers who may have a hard time financing a home. Some of these types of mortgages harbor excessive fees and variable rates that make a monthly payment double within a short period of time. The impact of the subprime mortgage crisis will hopefully deter these types of lenders in the future. A potential home buyer should also be aware that predatory loans have abusive prepayment penalties. A prepayment penalty can amount to thousands of dollars on a home loan. This would apply if a buyer tried to refinance to get a lower interest rate. The best way to go about purchasing a home is to go to several different lenders to see if they all say the same thing. Before closing and signing a contract have an attorney present to look over the contract to make sure that the buyer's interests are covered.
Sub Prime Mortgage LoansThe economy can be directly affected by sub prime mortgage loans, which are basically given to those who have less than satisfactory credit history. Over the course of history the market has followed a natural course of ebbs and flows due to various factors that directly affect consumers, businesses, and the nation as a whole. Recent years have seen an increase in loans approved to those who are unable to guarantee that payments will be met, and have resulted in increased foreclosure rates which unfortunately, lead to decreases in the value of houses and has a direct affect on consumer spending.
There are many who believe that sub prime mortgage loans are much more of a hindrance than they are helpful due to the negative impact they have on the economy. Everything is tied to everything else, meaning that if the value of real estate drops, construction jobs are affected, and a chain of reactions is set in action until the economy is adversely affected. Not only does the decline in value of new homes mean that money is lost, when the prices of houses on the market go down, so does the value of every home. As the value of a home drops, so does the home's equity which has a direct affect on consumer spending.
The problem with sub prime mortgage loans is that they are given to those who have poor credit history. This means that those in the poor credit bracket are considered to be high risk in regards to defaulting on payments, and violating the agreements of the loan. The actual term, sub prime, is one that incorporates not only mortgages, but also borrowed funds for credit cards and automobiles as well. All mortgage loans that fall under the category are most often not even approved by leading financial institution guidelines, however, the loans are approved regardless of the high probability that the terms of the agreements will be violated. The term also incorporates loans that are given to anyone, including non-employed individuals in order to purchase property which otherwise would not sell on a primary market. The primary market is concerned with financial security issues. Sub prime mortgage loans are issued to people who would otherwise be denied access to borrowed funds due to the fact that they would most likely be unable to pay the funds back or even meet the terms of the agreement.
Over the years, poor lending practices came about due to the number of people who applied for sub prime mortgage loans despite the fact of bad credit and in some cases even those who at some point had filed for bankruptcy. A combination of an increase in demand and a decrease in qualifications for lending does not make for positive situations. Traditionally, people with poor credit history would be turned away. However, more and more loans to those with bad credit are approved by subprime lenders. Subprime lenders, in an effort to gain an edge over competitors, approve loans to people who would otherwise be turned away. On the surface the process might seem viable, as thousands of people are able to own their own homes, however, the number of people who fail to make good on payments outweigh all the benefits of home ownership as well. Those who are unable to meet payments contribute to the growing number of foreclosures. Increased foreclosures lead to homes being put back on the market. Foreclosures have a direct affect on the value of homes across the country.
Despite the intense criticism that sub prime mortgage loans have been under. Some believe them to be a positive solution to increasing home ownership, however, on the other hand, increased loan approval has led to an increase in foreclosures. Whatever a person's viewpoint or opinion on the situation might be, everyone should look at the problem with an educated outlook. This means that those with bad credit should research ways that they might be able to better their credit before applying for a loan, and those who might already be in a tight spot financially, should do all that is within the means available to make good on the required payments. The more people who have a solid understanding of finances and a working knowledge of possible solutions, the stronger the market should become.
Those who find themselves in financially unstable situations should look to solutions, and many institutions have worked on solutions to problems that might arise. Sub prime mortgage loans have been highly criticized by the federal government which has led to some institutions increasing the standards for approval on loans, however, enough are approved to contribute to an even greater increase in difficult situations. Some look to adjustable rate mortgages as a solution, however, such loans only contribute to the problem.
There are hundreds of banks and financial institutions that offer assistance to people who might otherwise be financially naive. Before anyone applies for sub prime mortgage loans, they should make certain that enough assets are available that can be drawn upon in case the need was to arise. In order to stave off future difficulties, people should be aware of the details of an agreement, and make certain to understand the effects that delinquent payments could have, not only on themselves, but on the market as a whole, especially as such actions can lead to problems across the nation, "From whom the whole body fitly joined together and compacted by that which every joint supplieth, according to the effectual working in the measure of every part, maketh increase of the body unto the edifying of itself in love" (Ephesians 4:16).