The term "adjustable-rate mortgage" describes any mortgage with an interest rate and payments that adjust according to some formula agreed upon by the borrower and lender. ARMs have been generally available to borrowers for about three decades on prime mortgages, but variants have been common to subprime mortgages over the past 10 years. The traditional ARM linked the mortgage's interest rate to the LIBOR plus several percentage points." (Utt,2008)
Alt -- a Mortgages. Sometimes referred to as a "low-doc" mortgage, an Alt -- a mortgage is structured like the other mortgages described in this section but is made available only to prime borrowers or those with FICO scores above 660. However, these prime borrowers were required to offer only limited documentation on their qualifications, so many may not have been as "prime" as they represented themselves to be, as subsequent default rates indicate." (Utt, 2008)
Extremely Low- or No-Down-Payment Mortgages. As home prices appreciated and as mortgage originators and lenders looked to expand their pool of potential customers beyond those with sufficient savings and net worth to make the required down payment (generally 5% to 20%), lenders and investors began to offer and buy mortgages with little or no down payment. Sometimes they provided more than 100% financing by allowing buyers to borrow a portion of their settlement costs." (Utt, 2008)
Interest-Only Mortgages. Most mortgages today are fully amortized, meaning that each monthly payment covers both the interest and a portion of the principal. Over the life of the mortgage (typically 30 years), the principal amount will gradually be paid down to zero. (Utt, 2008)
Negative-Amortization Mortgage. A negative-amortization mortgage is much riskier than an interest-only mortgage because the initial payments do not cover all of the interest, so the interest deficiencies are added to the loan's principal, which increases over time along with the borrower's indebtedness. Once the flexible payment period ends, the monthly payments are even larger because the loan amount has increased and the amortization period is shorter. Risks to the lender are more severe than the risks that are encountered with interest-only mortgages." (Utt, 2008)
The subprime market while it is certainly in the midst of an extreme crisis did allow individuals who would not have the chance of buying their own home that chance and while many individuals lost their home due to foreclosure or default there are lessons learned from this situation which might be effectively applied in the future. Utt states that while the standards were greatly relaxed that it did seem "appropriate at the time and provided important economic benefits for all involved....
Enter the Fed, Yet Again Unable to understand that rapid interest rate moves create shocks to the market, resulting in distortions in supply and demand, the Fed dealt with the bursting of the housing bubble by lowering interest rates rapidly, this time to next to nothing. This response was intended to stimulate the economy. In 2001, the rate decreases were also intended to stimulate the economy, but they mainly stimulated one
Why Did Mortgage Lenders Lend to Subprime Customers? The growth of the subprime market owes itself to an influx of international and hedge fund investors who were increasingly separated from the final mortgagees. Banks and savings and loan institutions generally knew their borrowers, because they lived and worked in the same communities. When banks and S&L's held the mortgages, they were making a bet on the creditworthiness of people they knew
The Subprime Crisis There were a number of factors that led to the subprime crisis: Fannie Mae, Countrywide Financial, the Federal Reserve, Moody’s, Merrill Lynch, Bear Stearns, Goldman Sachs, AIG, Michael Burry, who shorted the mortgage backed securities being sold to investors that were full of subprime—and guys like him (the ones depicted in Michael Lewis’s The Big Short)—they all had a role to play in the subprime crisis of 2007-2008
Subprime Mortgage Crisis -- 4 Questions What is "leverage"? How does leverage magnify a bank's profit and losses? The term leverage refers to the use of someone else's money to create financial gain. In the mortgage industry, homeowners typically put down a small amount of money on a home, and borrow the rest in the form of a mortgage. This use of borrowed money for a large purchase is referred to as
Subprime Mortgage Crisis A major issue for today's economy in the U.S. is the subprime mortgage crisis. The mortgage crisis has sent the U.S. economy into a recession with greater impact than the Great Depression of the 1920s. One will discover some important terms that will allow the reader to better understand this topic. Additionally, this paper will examine some background information and events that led to the housing market crash
This is one of the biggest causes that contributed to the financial crisis. Where, the lack of ethical standards within the industry, helped to cause a number of executives from: loan officers to real estate appraisers, to engage in predatory and illegal lending tactics. Where, many would falsify the income, credit histories or out right lie to borrows about the mortgages they were receiving, along with the terms. This
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