Subprime Loan Fiasco

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What got us into this financial and real estate mess in the first place? In short it was lenders offering sub prime loans. We read about them in the newspaper but do you know what a sub prime loan is and how it affected things.

Subprime was an attempt to allow people with credit problems to get a loan typically at a higher interest rate. Many of the subprime loans were also adjustable rate mortgage loans. Initially the interest rate is low in order to help them make payments. But these loans had a nasty catch. After an amount of time, like 2 years, the rate would go up. Some would go up 1.5% every 6 months. Some would go up something like 2% annually. So, what was great the first few years soon became a nightmare and a loan that cost a person $ 720 would soon cost $ 2100 a month. This was enough to sink most people.

The big problem came in when the subprime was offered to people with good credit in order to get a bigger more expensive house. As always I think some numbers can make this clearer.

A person could get a 30 yr fixed with a $ 720 payment and get a loan for $ 108,000
A person could get a 40 yr fixed with a $ 720 payment and get a loan for $ 115,000
A person could get a 50 yr fixed with a $ 720 payment and get a loan for $ 119,000
A person could get an Interest Only with a $ 720 payment and get a loan for $ 123,000
A person could get a Sub Prime ARM with a $ 720 payment and get a loan for $ 216,000

So, you can see that with the subprime ARM a person could buy twice the house with the same monthly payment. That is until the ARM resets and the payments begin to skyrocket.

Lets look at typical 24 month interest only ARM loan in January 2004 for $ 200,000. This loan was tied to the LIBOR plus 4% margin. Here is what happened to this person.

Jan 04 - interest rate 5.5% (LIBOR 1.46 + 4%) and a payment of $ 916
Jan 06 - interest rate 8.9% (LIBOR 4.94 + 4%) and a payment is $ now 1483
Now the 2 years are up; the rate goes up 1.5% every 6 months
Jan 08 - interest rate is now up to 12.4% with a payment of $ 2066

So, you can see in just 4 years the monthly payment has doubled. For most hard working Americans this is just too much. And now we are seeing the foreclosure rates skyrocketing because of these horrible loans the lenders made.

You would like the if to learn about foreclosure loans in California the I suggest you visit: Http://davidcares.com/2011/02/02/el-cajon/california-foreclosure/

* Disclaimer - David Cairns is a real estate professional serving San Diego, California and is licensed by the State of California only under CA DRE lic # 01890743. All information on davidcares.com is for informational purposes. Information regarding short sales, foreclosures, buying homes, selling homes or any other information is general in nature and is not intended or should be construed as legal, tax, or other advice. Every person has a unique situation; I would be happy to talk to you regarding real estate matters. You must consult a legally qualified person for advice in all other areas before taking any action. I can be contacted via e-mail or on my site.

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Source by David E Cairns