The United States seem to go into a recession, interest rates are going up and jobs are getting harder to keep and to find. Individuals that should not have bought a house but did it anyway are now facing the truth: they can’t afford to pay their mortgage anymore. In our new economy, everybody wants a new car, the new house and the big life. But realty is about to wake us up and the first one to pay the price is the subprime lenders.
Subprime lenders are financial institutions specialized in high ratio financing and high risk clients financing as well. They will offer mortgages for 90% and more of the property value. There are even lenders that go up to 125% of the property value. All those institutions based their lending on the collateral value and its potential future value.
In order to cover the risk, subprime lenders are charging a premium. This is where they got their name from. They will charge a bigger rate according to your credit rating, the amount requested and the loan to value ratio. This type of business is very profitableâ€¦ as long as clients are making their payments!
Recently, New Century Financial, the biggest subprime lender in the USA, asked to be put under the protection of the bankruptcy law. This is the result of too many bad debts. As interest rates are going up, individuals that had a tight budget at the time of signing might not be able to keep up with their payments anymore. Therefore, the bank is obliged to call back the loan and realize the security. Unfortunately for them, housing market is going down too. This is why so many small financial institutions are going bankrupt these days.
Is it the beginning of a house market crash? Are we just slowing down after a big economic surge? Only the future will tell us. For now, be aware of what is going on in the market and keep an eye on the interest rates. It may also be a good opportunity to review your financial situation.
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