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If a mortgage is considered subprime, people usually assume that it is denoting that the interest rate is high. However, subprime actually refers to the credit score of the individual taking out the mortgage.
The size of the interest rate associated with a subprime mortgage is dependent on four factors, in order of importance: Therefore, borrowers with credit ratings belowfor example, will often be stuck with subprime mortgages and higher interest rates to go along with those mortgages.
Additionally, making late bill payments or declaring personal bankruptcy could very well land borrowers in a situation in which they can only qualify for a subprime mortgage.
Thus, it is often useful for people with low credit scores to wait for a period of time and build up their scores before applying for mortgages, to ensure they are eligible for a conventional mortgage.
An Example of the Rise of Subprime Mortgages For those who remember, the market crash and housing crisis was due in large part to wide-spread defaulting on subprime mortgages. Essentially, many borrowers were given what has been come to be called NINJA loanswhich are mortgages given to people with no income, no job and no assets.
Often times, these mortgages were issued with no down payment. Then, these borrowers found themselves underwater in a declining housing market, with their home values lower than the mortgage they owed. Many of these NINJA mortgages defaulted because the interest rates associated with the loans were called " teaser rates ," which were variable interest rates that started low and ballooned over time, making it very hard to pay down the principle of the mortgage.
However, potential subprime mortgages are again on the rise. As of JuneWells Fargo, Bank of America, and other financial institutions reported that they would begin offering mortgages to individuals who had credit ratings in the low s.Subprime lending has introduced a substantial amount of risk-based pricing into the mortgage market by creating a myriad of prices and product choices largely determined by borrower credit history (mortgage and rental payments, foreclosures and bankruptcies, and overall credit scores).
Financial Information. Overview; Annual Reports and Proxy Statements; Quarterly Results; SEC Filings; Fundamentals; Ownership . The value of U.S. subprime mortgages was estimated at $ trillion as of March , with over million first-lien subprime mortgages outstanding.
Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were days delinquent or in foreclosure proceedings as of October , roughly triple the rate of By . There has been a long term American policy of promoting home ownership.
This entailed making the financing of home purchases as easy as possible. ComE-IN Background Definitions. 1) Subprime Definition (based on borrower characteristics) In , the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the Agencies) expanded previously issued examination guidance for supervising subprime .
A subprime mortgage is a type of loan granted to those who would not be able to qualify for conventional mortgages, usually at higher interest rates.