Posts tagged "subprime"
A Subprime Primer - A Humorous Look at How Things Went so Terribly Wrong
This “story” has been making the rounds on the Internet. It offers a hilarious (yet somewhat accurate) view of how we got into the mortgage crisis. If you know who the original author is, please let us know so we can credit them appropriately.
Tip: If you’re having trouble reading the text due to its small size, click the “expand” icon in the lower right hand corner immediately below the graphic.
Caution: This animation contains language some may find offensive.
Top Eight Mortgage Tips for 2008
2007 was a difficult year for many homeowners as market conditions made it hard to keep up with mortgage payments. The mortgage market will continue to be challenging in 2008, as over $680 billion in mortgages are scheduled to reset. Whether you have a fixed rate mortgage, a variable rate, interest only or even a jumbo loan, there are things you can do to navigate the tricky world of your home financing.
Here is some advice from the team here at SmartHippo.com:
- Establish a budget. Your total housing costs – including your mortgage payment, insurance and taxes – should not exceed 26% of your gross monthly income. Your total debt payments – your housing payment combined with credit card, car loans or student debt payments – should not exceed 36% of your gross monthly income. A family with an annual income of $60,000 should budget a maximum of $1300 per month for housing payments, and $1800 for total debt payments.
- Beware the teaser rate. Some mortgage products offer an introductory rate that resets to a higher rate after a few years. This may make sense in some cases, such as when purchasing a property that will require repairs or renovations in the first year. But make sure the longer-term rate fits within the budget you established. Otherwise, you may be setting yourself up for trouble down the line.
- Manage your credit. Higher credit scores mean lower rates. Pay your bills on time. If you can’t pay them off in full, make sure you pay at least the minimum payment. Then, apply the remaining money you have to the accounts with the highest interest rates first.
- Talk to your lender. If you’re having trouble making your current mortgage payments, talk to your lender. Swallow your pride and do this before you start falling seriously behind on payment – at that point it may be too late.
- Shop around. Talk to your neighbors, friends, and coworkers and use the Internet to research what’s available. Remember that rates posted on bank sites are often not what you’ll get, so you’ll want to find out what terms people are actually getting.
- Compare apples with apples. Costs such as application fees, attorney fees, appraisal fees, and more may be included in one lender’s quote but not another’s. The devil is in the details, and not checking them out can cost you thousands.
- Protect your identity. Be careful with web sites that ask you to submit your personal information without knowing in advance who it will be seen by.
- Seize the opportunity. If you’ve weathered the storm, or are in the market for your first home, it’s a buyer’s market. Many banks offer foreclosures that are not listed with real-estate agents or on the Multiple Listing Service.
Do you have any tips to share with other hippos as we begin 2008? Or an experience (good or bad) you’d like to share? Enter your comments in the form below.
Subprime voted 2007 word of the year
In its 18th annual words of the year vote, the American Dialect Society voted “subprime” as the word of the year. Subprime is an adjective used to describe a risky or less than ideal loan, mortgage, or investment. Subprime was also winner of a brand-new 2007 category for real estate words, a category which reflects the preoccupation of the press and public for the past year with a deepening mortgage crisis.
Subprime beat out green-(the prefix), Facebook, waterboarding and Googleganger foe the top spot in this year’s list. What’s a Googleganger, you say? It’s someone whose names shows up alongside yours when you Google yourself. Now you know.
Other mortgage-related words in this year’s list:
- Exploding ARM: An Adjustable Rate Mortgage whose rates soon rise beyond a borrower’s ability to pay.
- Liar’s loan/liar loan: Monet borrowed from a financial institution under false pretenses, especially in the form of a “stated income” or “no-doc” loan which can permit a borrower to exaggerate income.
- NINJA: No Income, No Job or Assets. A poorly-documented loan made to a high-risk borrower.
- Scratch and dent loan: A loan or mortgage that has become a risky debt investment, especially one secured with minimal documentation or made by a borrower who has missed payments.
The original announcement and full list is available here.
The Bush Subprime Bailout: What about the Problems that Got Us into this Mess to Begin With?
The web is abuzz this week with reaction to President Bush’s plan to help homeowners with subprime mortgages who are at risk of foreclosure. Bush announced the plan yesterday, which is aimed at 1.2 million borrowers who are at risk of foreclosure when their “teaser” rate period ends and the rates are readjusted. These borrowers will be able to either refinance their mortgage, have it guaranteed by the Fair Housing Administration, or freeze their teaser rate for a five year period.
MoneyCrashers correctly pointed out that there is enough blame to go around:
My original position stays the same that I believe mortgage brokers, mortgage lenders, and consumers are equally responsible for the collapse in the subprime market. Consumers knew what they were getting into when they signed the dotted line. No one is stupid enough to think that they can buy a $400,000 house with little money down for such a low payment. They had to understand the risk of the rising interest rates in the future. Mortgage lenders knew exactly what they were doing, too. Their philosophy was: just grab all of the business we can during the housing boom and figure out what we did later. I don’t think they were forecasting the amount of foreclosures that we’re seeing and going to see in the future.
SmartHippo has issued a press release stating that while the bailout is good news for consumers who may otherwise lose their homes, the root causes remain unaddressed.
“Let’s face it. Some consumers took on loans they knew they couldn’t afford, but others lacked the knowledge or information to make wise decisions. This was exploited by certain lenders who put short-term financial gain ahead of their customers’ best interests,” said Favvas.
Favvas cited the example of mortgage brokers who steered consumers to subprime loans from lenders paying the brokers higher commissions, even when the consumers could have qualified for lower-interest prime loans.
“The subprime crisis has triggered the beginning of a fundamental transformation which will lead to a more consumer-centric approach to lending based on transparency and accountability,” Favvas said. “The lenders who understand and embrace this transformation are the ones who will succeed in the long run.”
You can read the full press release over at Yahoo! Finance.
Until we empower consumers with the tools to make better financial decisions, and create economic incentives for lenders, we’re just setting ourselves up for a repeat — whether it’s in three, five, seven, 10 or 15 years.
There’s an old adage that says that if you owe the bank $100 and you can’t pay, it’s your problem, but if you owe the bank $100 million and you can’t pay, it’s their problem. You can now add to that if 1.2 million people owe the banks $350 billion and can’t pay, well, then it becomes the government’s problem.
What do you think?