Sub Prime
March 27th, 2007 |Should we feel sorry for sub-prime mortgage holders who end up losing their homes?
Typically, a holder of a sub-prime mortgage is someone with a credit score that did not allow them to qualify for prime financing. The term “prime” has nothing to do with the prime interest rate, but instead refers to the ‘quality’ of the mortgage product. A sub-prime mortgage usually has higher fees than a prime mortgage as well as a higher interest rate or adjustable interest rate. The higher cost and interest rate are to compensate the lender for taking the risk on someone with a lower credit score.
So, a home buyer with less than stellar credit gets into a home thanks to a sub-prime lender. This is someone who may not have qualified for a mortgage any other way.
The sub-prime mortgage industry is getting hammered due to more borrowers defaulting on their house payments. I don’t feel sorry at all for these lenders as they knew the risk that they were taking and took it anyway. But what of the borrower?
In the Alt-A sub-prime market, in which consumers with slightly better credit than the weakest sub-prime borrowers, late payments and defaults are running at four times the historical rate. Should we be concerned with someone who falls behind on a loan that they may not have qualified for under traditional lending rules? Should assistance be provided to allow someone to keep a home that they would not have otherwise been qualified to purchase?
Is this a case of a predatory industry attempting to take advantage of those with less means in order to make a profit or consumers taking out loans that they never had the ability to repay?
