Chattanooga Real Estate Blog

Lower income households are in for a rude awakening now that interest rates and the number of shady real estate speculators have increased while the unsteadiness of the recent economy has led to decreased property value. These issues have led to subprime loans and other interest-only loans to come under greater scrutiny. Subprime loans are offered to people with questionable credit histories so that they can buy property, albeit at higher interest rates and prepayment penalties. Subprime lenders have recently fallen, economically; the most well-known company to suffer has been New Century Financial, which at the present time is almost bankrupt. These companies have given loans to precarious borrowers, who have been eager to own property such as their own homes.

A few years ago, while real estate was booming and property values were increasing, borrowers, using subprime loans, were able to refinance their mortgages on assets and make a healthy profit. Unfortunately subprime borrowers could not even pay off their mortgages to begin with and fell behind on payments. In this situation, two years ago, borrowers were able to sell their homes to escape with their credit intact but now this is not an option because the price of housing has decreased leaving many people to have their properties foreclosed. Economist David Lereah expressed that of the adjustable-rate mortgages awarded by different investment banks, dating back to 2004, almost 25 percent of them were subprime. Of this 25 percent, 55 percent of these, valued at almost $330 billion, will be foreclosed because borrowers are unable to keep up with their mortgage payments.

Everyone involved with subprime loans are to blame for this crisis. Homeowners took on mortgages that in the long run were too expensive for them to afford; lenders continued to award risky loans; and market regulators did nothing to stop lenders from this flawed practice. Also, while subprime loans were flourishing, lenders and shareholders were making huge amounts of money and borrowers were happy to be able to own property. Unfortunately, at the time, everyone was making intuitive decisions based on he or she’s individual situations.

Even though many are discouraged with the subprime loan situation, there is still hope that subprime loans will not have more negative ramifications. Many believe that the situation is only temporary and it is only a matter of time before property values begin to rise again and then subprime loans will flourish again. Time will tell if the investment banks and homeowners will be able to recover from the present subprime crisis.