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Home Buyer's Recession Survival Guide - The Subprime Meltdown

Updated on May 26, 2009

We've all read about the subprime meltdown: The unmitigated disaster for some families who took out hybrid ARMs (Adjustable Rate Mortgages) a few years ago to ensure that they got the low "teaser" interest rates for the first couple of years of the loan. A buyer with bad credit in 2007 might have signed up for a popular 2/28 hybrid ARM for $250,000 which would have allowed them to lock in a fixed rate of 4% APR. However, that lock in was only temporary and preset to expire in two years. Well, the two years are up, and that home owner will see their monthly payment spike overnight from their current $1,194 to $1,659: A jump of almost 40% that some families simply have no way to afford!

How did this mess happen? It's a long and sad tale of ridiculously aggressive and unconscionably greedy lending practices compounded by the sheer stupidity of home owners so desperately trying to get on that first rung of the property ladder that they would have signed their souls away to Mephistopheles.

It turns out that they might have done the next worst thing.

Many of the people who took out these incredibly risky ARMs are responsible citizens who would think twice before betting $5 on the turn of a card. Yet, they have gambled their entire homes on what was really a coin flip: 50% chance that the rates would go down and they'd come out ahead, and 50% chance that the rates would go up and they would be financially devastated. Well, guess what? The rates went up. Way up.

A Subprime mortgage is a loan granted to a borrower who is rated "subprime" which is a nice way of saying "with lousy credit." In exchange for a higher interest rate, lenders would overlook a history of late or missed payments, without much concern as to the fact that their own future payments might meet the same fate.

The problem really started when the mortgage market began to be motivated by commission sales departments working on fees. The company would just package and sell any mortgages they were able to place onto other investors, so they were in a no lose situation. They made their fees no matter whether the buyer ever made a payment or not. This sparked a rush of mortgages to anyone who could demonstrate they had a pulse, even if they were currently being hounded by collection agents! And if the house really wasn't worth as much as the loan, oh well... we're sure that house prices will always rise and take care of that little eventuality. When house prices stagnated, that marked the beginning of the end of the big party.

It turns out that the investors who got stuck holding the bag, really didn't. They started forcing lenders to buy back the rotten mortgages that they had literally given away. That's when the avalanche started. Well over twenty major and very well known mortgage lenders had no way to meet these demands and rushed to bankruptcy court.

Where this whole collapse hit the home owner was right where it hurts the most. They may have less than 10% or in some cases less than 5% equity in their homes. In the current market, and with their poor credit, they stand little to no chance of finding a refinance option at any interest rate. 15% of all mortgage holders have a credit score below 620 and many conventional lenders won't even look at their applications unless there is equity upwards of of 15% in the property. For all those people who took Zero Money Down mortgages, that is the ultimate bad news. House prices have dropped in many markets, so even if a home owner had 10% equity in the property a couple of years ago, they may be "upside down" today, in other words they are carrying a loan that is worth more than the house it's based on!

Lending practices have tightened up considerably since those halcyon days of free mortgage money to anyone who wanted some. But the ongoing damage to thousands of American families who will have their home and their dreams ripped away from them, will last for years to come.

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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