What are subprime mortgages ?
by Larry Thomas

Most all of us have heard the term subprime mortgages in print media and television. What is it and what effect has it had on our current financial crisis ? The term itself is misleading because sub meaning below would lead one to believe that this type of mortgage is actually below the prime rate. In fact it means just the opposite, above the prime rate. It is a type of loan granted to individuals with poor credit histories( often below 600 ), who as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate.
Many lenders were more liberal in granting these loans from 2004 to 2006 as a result of lower interest rates and high capital liquidity. Lenders sought additional profits through these higher risk loans and they charged interest rates above prime in order to compensate for the additional risk they assumed. Naturally with higher interest rates, one has larger monthly mortgage payments which increased the chances of default and eventual foreclosure, especially with borrowers that have a history of shaky money management. Consequently, once the rate of subprime mortgage foreclosures skyrocketed, many lenders experienced extreme financial difficulties, and even bankruptcy.
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