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12 Days Winner: Robert KiyosakiSUB PRIME MORTGAGES
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The Federal Reserve announced on Monday that it would be hitting Wells Fargo with an $85 million fine for allegedly pushing borrowers with good credit into expensive mortgage loans. The bank also received the record fine from the Fed for allegedly falsifying its borrowers’ loan applications.
Borrowers with Good Credit Pushed Into Subprime Mortgages 
Civil fraud charges could be filed against several major credit rating agencies for their role in developing mortgage bond deals that helped bring about the financial crisis in 2008. The Wall Street Journal reported on Friday that the U.S. Securities Exchange Commission (SEC) is currently looking at the role these companies played in the crisis and exploring the possibility of holding them accountable.
SEC Reviewing Conduct of Companies
Back in the real estate “boom” days, using an adjustable rate mortgage seemed like a clever idea. Home buyers looking for the lowest interest rates possible, and even those who planned on only owning their home until the ARM rate readjusted, were all willing and eager to sign on the dotted line.
Fast forward to 2008, when the the foreclosure rate skyrocketed to 75 percent and the hot real estate market came to a screeching halt. Many homeowners found themselves unable to handle their ARM mortgages. Part of this catastrophe was fed by the jumps in interest rates during the readjustment periods of adjustable rate mortgages.
The term “sub-prime” refers to borrowers who do not qualify for the lowest, or “prime” rate of interest on a loan. Therefore, sub-prime mortgages are a class of loans offered at a higher rate of interest to borrowers who are unable to qualify for lower-interest home loans from conventional sources.
The reasons why a home buyer would be unable to qualify for a conventional loan vary, but generally, it is because lending to the borrower is viewed as a risk due to a poor credit rating or an inability to prove income. For example, someone with a credit rating below 620, a spotty work history and/or a lack of tangible assets would be considered a risk and would most likely be unable to qualify for a prime rate loan through a traditional lender therefore, need a sub-prime mortgage.
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Though they represented the majority of home loan defaults that sparked the sub-prime mortgage meltdown in late 2007, sub-prime mortgages aren’t necessarily a bad thing. Much stricter standards have been placed on sub-prime mortgage loans to prevent such a crisis from occurring again.
If you’ve been excited by the incredibly low mortgage interest rates we’ve witnessed for the past few months, you’re not alone. Consumers and housing experts alike have been amazed by these rates, which to date are the lowest on record.
However, while everyone is marveling at mortgage rates, no one’s really doing anything to take advantage of them, as evidenced by record-low home sales. So why on Earth is no one jumping on them when they’re going to start climbing again sooner or later?
Major banking giant Wells Fargo has decided to stop offering subprime mortgages and plans to close 638 subprime lending offices that operate nationwide. The subprime mortgages are typically handed out to those in lower-income neighborhoods.
The bank decided to drop the mortgages because they simply don’t provide the business that it’s looking for anymore. However, it will still provide subprime auto loans and credit cards. As a result the unit closure, about 3,800 employees will lose their jobs (LA Times).
Recently, we produced a series about underwater mortgages – everything from what an underwater mortgage is to how to find underwater mortgage help. In case you missed it, here’s a recap along with the latest news so you can stay up to date.
Number of Underwater Mortgages Dropping – But Still High
The nation’s real estate crisis is so severe that it is dragging the rest of the economy down with it. Banks, which lent out mortgage loans almost indiscriminately, are now saddled with fatal amounts of bad debt because people can’t pay these mortgage loans.
The Securities and Exchange Commission (SEC) has recently filed suit against Goldman Sachs for subprime-related charges and some experts say it may not be the last suit. It seems that despite the financial turmoil the economy suffered as a result of subprime mortgages gone wrong, more companies are taking part in this practice.