Worry Over Subprime Home Loans

Most Home Buyers are considered good risks, yet many banks have taken the risk of subprime loans because those buyers pay higher interest rates.  

The complexity of home loans grew along with the housing market. Now, that market has cooled. At the same time, many buyers, and not just in the subprime market, are seeing their monthly payments go up. Nontraditional loans often start with low payments for the first year or two. 

By the end of 2007, fourteen percent of all home loans were subprime, and total mortgage debt in the United States was in the trillions of dollars.   Some experts worry that the problems has affected the wider economy. Congress has acted to control risky lending. And Senate Banking Committee Chairman Christopher Dodd says federal aid may be needed to protect buyers. 

If a buyer misses too many payments, the bank may try to reclaim the house through a forced sale. Nationally, foreclosure rates increased in the past few months, but especially among risky loans. 

A number of investors have already failed or left the business. Yet some may be able to escape losses by passing their risk to others. Many lenders sell their subprime loans to investment banks. The banks resell the loans, creating trillions of dollars in mortgage-backed securities. These are bought and sold on financial markets.  But some of these investments can be very risky if homeowners cannot repay their loans.  

Subprime loans are only part of the story, however. Home prices have fallen significantly. So many people who cannot meet the increased mortgage costs and are unable to sell their home, are simply walking away.  As a result, home foreclosures have increased significantly.