Avoiding a Mortgage Meltdown


Quick Facts

  • Subprime mortgages are real estate loans that were marketed to people with less-than-perfect credit ratings.
  • Subprime mortgages typically had variable interest rates, which could spike after several years.
  • Rather than foreclosing on homes, some banks are putting more effort into working with owners, even re-negotiating the original terms of mortgages.

JOEL ZAND, FindLaw.com

You’ve probably been reading a lot about the subprime mortgage crisis recently. If you own a home, should you be worried? Does this mean that the American dream of owning your own is impossible to reach?

That depends on you, your financial situation, and where you live or want to buy a home.

The Subprime Mortgage Crisis

Subprime mortgages are real estate loans that were marketed to people with less-than-perfect credit ratings. They may have a history of bankruptcy, been delinquent on their car loans, spent far more than their salary or income could support. People who obtained a subprime mortgage to buy their home also tended to have little savings.

While housing prices continued rising for more than a decade, many banks were happy to lend money to homeowners with the expectation that these prices would keep rising. Some banks had no hesitation about giving mortgages to buyers who couldn’t verify their income, or lacked the money to make a down payment on a house.

But the real trouble with subprime loans is that they had variable interest rates. While they may have been temptingly low to start, those monthly loan payments could spike after several years. A payment that was $750/month might spike to $1,750/month, a difference of $1,000 that adds up to an extra $12,000/year in mortgage payments for the homeowner.

For folks with modest resources -- the very customers that lenders targeted with these loans -- an inability to make their monthly mortgage payments can quickly mean that a bank holding their mortgage will foreclose on their home. 

Suddenly the very house that a lender said the homeowner could afford might be one they can’t. If your home is worth far less than what you owe on your mortgage, you will be ‘upside down’ on your loan. Selling your house in that scenario may not result in you paying off your loan. Bankruptcy could be an option.

Getting Help

That’s when it might be time for you to get help from a real estate lawyer, or an attorney who helps people with debt relief. They might be able to do some professional worrying -- and problem solving -- for you.

Rather than foreclosing on homes, some banks are putting more effort into working with owners, even re-negotiating the original terms of mortgages.

New federal programs enacted by Congress may also help some, but not all, homeowners get emergency mortgage relief.

Finally, if you’ve been happily renting and saving all these years because housing prices were too high, this could be the right time for you to buy!

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