The term “sub-prime mortgage” applies to mortgages approved for those that many banks would turn down. This may include those with a history of spotty credit or who earn less than most banks would think is the minimum salary requirement to qualify for a mortgage. A few years ago, many small mortgage companies sprang up with more relaxed terms for those applying for a mortgage, and the term sub-prime mortgage came into use for these applicants.

Who Was to Blame for the Subprime Crisis?

There has been a lot of talk in the news lately about sub-prime mortgages, the credit crunch, and the possible recession these problems caused. For those who don’t work in the real estate, banking, or mortgage industry, wondering what all these different problems mean and how exactly they relate, we can help. There is a very simple explanation of what sub-prime mortgages are, how they caused the current credit crunch, and how this situation affects the US economy as a whole.

The term “sub-prime mortgage” applies to mortgages approved for those that many banks would turn down. This may include those with a history of spotty credit or who earn less than most banks would think is the minimum salary requirement to qualify for a mortgage. A few years ago, many small mortgage companies sprang up with more relaxed terms for those applying for a mortgage, and the term sub-prime mortgage came into use for these applicants.

Usually the mortgage rate is based on a primary rate determined by the federal government.

One or two percentage points are added to the interest rate for a standard mortgage for the loan company’s profit margin. This KPR interest rate can increase or decrease over the life of the loan based on fluctuations in the main interest rate (variable KPR) or the KPR interest rate can be locked as a certain interest rate (fixed KPR).

The sub-prime rate hype is awarded at a rate below the prime rate with an automatic increase to the standard rate typically within two years. People can now qualify for new lower rates that may not qualify for standard rates. Homeowners believe they will be able to pay the new rates within two years or they can simply refinance the new mortgage hoping the main interest rate will continue to fall.

Well, the main interest rate went up and now homeowners are faced with mortgages that increase by two, three or even four hundred dollars a month with no way to qualify for the new mortgage. Could you pay over four hundred dollars on your home mortgage and not feel a bite?

One thing to keep in mind when trying to understand how these sub-prime mortgages affect the economy as a whole is that it is rare for a mortgage company or bank itself to actually carry a mortgage as debt itself. Usually what they do is turn around and sell those mortgage notes to larger banks and investment companies. These investment companies and banks then use these mortgages as collateral or as part of their overall financial portfolios to sell bonds for their value. There are only a few major banking institutions that actually carry mortgages, including sub-prime mortgages, meaning that when people start defaulting on their home loans, this doesn’t affect just the little fly-by-night mortgage companies. The larger banks and institutions now have a large portion of their financial portfolios beginning to fold.

When these larger banks and lenders feel like a pinch of the mortgage will default, they then need to compensate somehow and ensure that other areas of their financial portfolios are left intact. This means that they come up with stricter rules as to who can get credit from them; When economic times are good, banks usually have less stringent credit terms, but when times are bad, they pinch those terms.

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