"Subprime rate" mortgages are deceptively appealing. They have enabled families to buy a home (usually their first home) with little money down, an immediate low, affordable interest rate, and a hope that interest rates won't rise.
From 1938 to 1968, Fannie Mae was a government monopoly, and in 1968 the federal government created competition for Fannie Mae by authorizing the creation of privately-owned Freddie Mac.
Because of the great appeal of lending to families not qualified to obtain a regular mortgage, the lenders set significantly higher interest rates (after expiration of the initial period of less than a year in which the interest rate is artificially low) than are being paid on regular mortgages.
Most of these originating lenders (including Fannie Mae and Freddie Mac) never intended to hold these mortgages. They package and sell mortgages to investors of various types. The originating lenders would generally put together a group of recently-created home mortgages (together with the promissory note and personal guarantees) and sell them as a package to investors or groups of investors often specializing in the acquisition and service of home mortgages.
Another interest obtained by the lender, and assigned to investors, is the right to take back your property in the event of a default, and (if they comply with various rules) wind up owning the property while you, the borrower, still owe them a sizeable amount on the loan, including default interest at a much higher rate, attorneys' fees for the foreclosure proceedings, costs and other expensesIt is not inconceivable that you could wind up owing far more than the principal amount of the loan and lose all interest in your property. This is a neat way for the lender or investor to have his cake and eat it too. The lender still has you owing at least as much and the lender winds up owning the property.
An Associated Press article on March 25, 2007 entitled Senator "Schumer urges more regulation of subprime mortgage rates" stated that over the next few years there is going to be "the biggest foreclosure crisis ever", unless action is taken to prevent "economic forces" from pulling the trigger. "The subprime market is the wild west of mortgage loans, and it's time we bring a sheriff into town," Schumer said. "The first step is making sure that borrowers are protected from these usurious lenders.
Subprime lenders peddle mortgages that often require no money down and are made at "teaser" interest rates that soon rise. They target marginal borrowers with weak credit or questionable incomes who previously might not have gotten a loan at all. Schumer said an analysis by his office found that an estimated 1.8 million American families are at risk of foreclosure when the rates are reset within two years. Schumer said his bill would establish a suitability standard for borrowers so that lenders won't be able to issue a loan that the borrower cannot afford."
