SubPrime Mortgages

Simply put, Subprime Mortgages are just as the term describes—mortgage loans deemed to be below prime status. These are loans given to borrowers who have little to no income, no job prospects and no proof of assets or collateral to back up the loan. In other words, they are high-risk borrowers with bad credit scores and no proven income. 

In addition to carrying high interest rates these mortgages sometimes had adjustable interest rates that were set to go up after a certain number of payments were made, although some were interest only loans.

Originally, these mortgages had a noble purpose—to offer a way for consumers to purchase a home while they repaired or built their credit history or employment status. They were the effects of George W. Bush’s “ownership society,” since having a home has always been considered a form of savings. However, no one anticipated that the banks would be other than prudent in their lending habits.

But during a period of easy credit and readily available cash, banks began looking for competitive ways to attract new business and were led to extend loans with little regard to the borrowers’ ability to repay them.   That attracted sub-prime borrowers as well as speculators who overextended themselves by buying up multiple properties with the intention of flipping them for profit.

Mortgage rates were adjusted higher as the economy began to slow, mortgage defaults were on the rise, housing prices began to slump and the resulting mortgage crisis was the next step in what would become a global economic meltdown.