Sub-Prime Mortgages: What is the problem?
October 30, 2007
It has been estimated that nearly 3 million home loan borrowers are in the sub-prime category of adjustable rate mortgages which are set to readjust to much higher rates by the end of the year 2008.
Once this happens, it is expected that more foreclosure will take place as homeowners are faced with loans they simply cannot pay. The average sub-prime home loan borrower is paying, on average, $400 more a month once it resets.
The problem only gets worse as the value of homes is dropping. Prices for homes within the United States fell by 3.2 percent in the second quarter of this year alone, and they continue to fall in many areas.
This presents a challenging problem for those in the sub-prime market. As prices fall, the value of the house that they are paying for drops. This means that if they choose to sell, they will not be able to get what they owe on the house. In essence, this means they lose money and in some cases a lot of money on the sale. Those homeowners who have missed any mortgage payments, and that constitutes several thousands of people, will not be able to qualify for any government bailouts. This also applies to those who owe more on the home than what the home is currently worth.
In the month of August alone, foreclosures in America increased by 36 percent from July. During that same period lenders mailed out default notices to over 100,000. Last year during this same month, the number was only 42,000. A recent RealtyTrac study concluded that there is one foreclosure filing for every 510 U.S. households