Nora Hansell asked: Many individuals and families with less than perfect credit scores have found themselves caught up in the recent US subprime mortgage crisis. In many situations, they are the victims of unscrupulous lenders who have engaged in predatory lending practices and unfair, or “teaser”, interest rates. The end result is that many victims have come out of the crisis with their credit histories in ruins. These are typically people who had less than perfect credit to begin with. Many believed their subprime mortgages would eventually help them earn better credit, only to have the outcome be the exact opposite.
Subprime lending is a term used when loans are given to borrowers who have blemished credit histories, lower income levels, and/or less than perfect job histories. These people cannot qualify for traditional mortgages at market interest rates. As a result, lenders offer loans with higher interest rates and unconventional terms. Although some feel that this type of lending is important in helping this group of people access credit and build credit, the recent fallout in the US housing market has had disastrous results for this very group.
The individuals hardest hit by this crisis are those who are most vulnerable to changes in the housing market and changes in interest rates. Subprime adjustable rate mortgages (ARMs) account for 6.8% of the mortgage loans currently outstanding in the US, but in the third quarter of 2007, these loans represented 43% of the foreclosures instigated during this same period.
There are a variety of types of ARMs, however many ARMs allow borrowers to pay a fixed interest rate for an initial period, after which the rate can increase as much as 2% per year. These mortgages can cost far more than a traditional mortgage. A 4% fixed rate on a 30-year, $500,000 mortgage would end up costing the borrower $864,000. An ARM, with an initial three year lower rate period, at 10% for the remaining 27 years would cost the borrower $1,367,280.
The message is clear to those still hanging onto ARMs. “Your last rate reset may have been a nonevent, but your next one won’t be,” voices Greg McBride, senior financial analyst for BankRate.com.
The Effect on Subprime Borrowers
There is no question that the majority of subprime borrowers are those individuals with poor credit scores. The payment delinquency rate for these ARM borrowers has ballooned to four times its historic level. Easy access to credit, along with the belief that US housing prices would continue to increase, led many borrowers to overextend. However, once housing prices began to drop, refinancing loans became more difficult, causing many borrowers to default as their interest rates and corresponding payment obligations increased. The negative effects of this on their credit scores cannot be underestimated.
Credit Repair for Victims
The real victims of this debacle are those individuals who strove to increase their credit scores through home ownership, only to have the carpet pulled out from under them, largely by forces entirely beyond their control. Foreclosures, bankruptcies and late payments are some examples of negative credit information that markedly lowers a person’s credit score.
If the mortgage crisis has left you in a credit crisis, some simple suggestions may help. The first step is to Obtain copies of your credit report to ensure that all the credit information they contain is accurate. If there are any inaccuracies, consult a legitimate credit repair company. An expert can not only get errors on credit histories corrected, but can also help a client with debt consolidation strategies to assist the client in rebuilding a good credit score.
The worst thing a victim of the subprime mortgage crisis can do is give up and walk away. It is critical to face the challenge head on so that your credit score doesn’t end up further hampering an ability to get access to credit at a reasonable rate and use that credit to help build a higher credit score.
Credit repair services can help.
Reginald
