Subprime Mortgage Crisis

The large number of defaults and foreclosures on subprime mortgages since 2006 has led to what some call a subprime mortgage crisis: 2.2 million subprime loans in recent years have ended or will end in foreclosure at a loss of $164 billion. And it's not over yet. An estimated one in five subprime mortgages will fail in the next two years [source: Federal Reserve].

Foreclosure sign and home
© Joe Raedle/Getty Images
Subprime mortgages are a leading factor in the
­foreclosure rate.

The blame for the crisis is shared among several factors. Many mortgage brokers steered their clients toward loans they couldn't afford. Previously, when someone wanted a loan, he or she would go directly to the bank. More and more, people are going to mortgage brokers to act as the go-between. The result is an industry that isn't directly accountable when a loan goes bad. Mortgage brokers don't suffer any penalty when a loan they drafted is defaulted, so there isn't much incentive to turn down applicants in this commission-based industry.

The unemployment rate is also a factor in the crisis. Midwestern states hit hard by auto industry layoffs rank among the highest in foreclosures [source: Federal Reserve]. Many people were counting on being able to refinance to make their loan affordable, but slowing appreciation rates in the housing market have made it difficult or impossible. Once the introductory period on the subprime loans ran out, the new payments were more than many could handle.

The borrowers also must bear some responsibility. It's common for someone looking to get into the housing market to overstate his or her income to secure a loan.

Another ugly facet of the subprime crisis is the assertion that many lenders exploited minorities in the rush to get rich. The Home Mortgage Disclosure Act (HMDA) of 1975 made it mandatory for lenders to maintain and disclose data in relation to their loans. In recent years HMDA numbers vary wildly across racial lines. Black and Hispanic borrowers are more likely to have a subprime loan than Caucasians. In fact, in 2006, there was a difference of 36 percent, with 53 percent of blacks having subprime mortgages compared to only 17 percent for Caucasians. In addition, a 2006 study by the Center for Responsible Lending (CRL) found that when credit risk was equal, blacks were still 31 percent to 34 percent more likely to receive a higher rate than Caucasians [source: CRL]. In July 2007, the NAACP filed a lawsuit against 14 leading subprime lenders for practicing "systematic, institutionalized racism in making home mortgage loans." The suit is based in part on the CRL study [source: NAACP].

Neighbor Works
Not all the news is bad in the world of subprime lending. One nonprofit organization called Neighbor Works America is doing something about it. Through its Center for Foreclosure Solutions, the organization has joined forces with mortgage and insurance companies to reach out to borrowers in need. It trains foreclosure counselors to assist borrowers and inform communities of their options.

Neighbor Works took action after learning that a common problem between subprime lenders and their clients is a lack of communication once the borrower fell into financial straits. Often, the borrower is ashamed or afraid to call his or her lender, even though there are actions that could be taken to prevent foreclosure. Lenders often have trouble locating the people in need of advice. ­

Neighbor Works received more than 100,000 calls so far in 2007 on their hotline. To explore your options, you can call the hotline at 888-995-HOPE, or visit their Web site.

­

For more information on subprime mortgages, please explore the links on the following page.