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Recently, the housing market, coinciding with subprime lending, has been a hot topic in the news and the economy. The market has changed over the past few years, and lately, we’ve heard a lot about subprime mortgages.

What’s subprime?

Subprime mortgages are generally for borrowers with a low credit score. They often have higher interest rates, prepayment penalties, balloon payments, and run a greater risk of foreclosure. Many times, subprime mortgages are adjustable rate mortgages. These start out with a low rate for the first year or two and then adjust every 6 months or more to a much higher rate.

What happened?

A few years ago, when interest rates were low, many people took advantage of the mortgage offers. The subprime market gave people with not so good credit, the opportunity to own a home. These lenders offered mortgages at higher interest rates with additional fees attached. There are numerous mortgage companies; most are legitimate prime and subprime lenders, but some are not. And that’s where the problems began.

What is Predatory Lending?

There have been some mortgage lenders who try to take advantage of and cheat borrowers in the subprime market; these are known as predatory lenders. They approach people with “to-good-to-be-true” solutions to their borrowing needs. These solutions often end with the borrower receiving a loan they cannot afford and eventually having to foreclose on their mortgage.

Some of the tactics lenders use include:

• Leading the borrower to believe that his/her credit score is lower than it really is to charge outrageous fees and higher interest rates.

• Pressuring the borrower to refinance the mortgage frequently and charge high closing costs, fees, and prepayment penalties.

• Issuing the loan regardless of whether the borrower can repay it.

What does this mean to you?*

Believe it or not, subprime mortgages can affect you, even if you are not a subprime mortgage holder. Here’s how:

As a homeowner
Decrease your home’s value. Studies show that for every foreclosure on your street, next door, or in your neighborhood, the value of your home decreases by 1 percent.

Housing market
If you’re in the market for a home, you’re in luck. With more houses on the market than buyers, sellers really have to price their house competitively. As we have seen the value of homes decrease in many areas, as a buyer, you can afford a larger home for less. Plus, if you have good credit, the interest rates on a 30-year fixed rate mortgage are very attractive. For those with not so good credit, the requirements for obtaining a loan have gotten more difficult due to the subprime mortgages.

Selling a home
If you’re trying to sell a home, it has become more difficult to find a buyer. Not only are there more houses to choose from, but with the strict requirements for obtaining a loan, there may not be as many qualified borrowers out there. It’s important that you price your home right in order to sell quickly.

In the market for a mortgage
With the major issues of the subprime mortgage industry, it is very important that you find a lender you can trust and feel comfortable with.

GECU Mortgage Department & Professionals
Our friendly and knowledgeable professionals do not work on commission. They take the time to listen to your needs and ask questions to help determine the best mortgage for you. They never push you into a product that is not right for your specific situation. Our professionals truly look out for your best interest.

For more information about subprime mortgages, please visit these websites:

• Bank Rate

• U.S. Department of Housing of Urban Development
   

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*Sources: money.cnn.com, "Top Tips: how the subprime fallouts affects you," Gerri Willis, March 22, 2007,  http://money.cnn.com/2007/03/22/pf/saving/toptips/index.htm?postversion=2007032212. June 11, 2007