By now you’ve all heard about the problems in the subprime mortgage market. To summarize, if a person with bad credit and no money down wants a house, giving them a loan can make a ton of money for anyone willing to charge them exorbitant interest rates. With the housing market the way it was recently, it didn’t matter that they were unqualified because their homes would drastically increase in value almost immediately. Then, when they realized that they really couldn’t afford the place, they had no trouble selling it.
Now that the housing market sucks in comparison, these people who never should have been approved in the first place are defaulting on their loans, many of them in the first few months. When this happens, secondary mortgage purchasers (Fannie Mae and Freddie Mac) force the lender to buy back the loan. This means that lenders who made too many of these loans are bankrupt. And, since we’ve recently seen that neither Fannie nor Freddie are particularly concerned with things like obeying accounting laws, it follows that they are similarly unconcerned about ethical lending practices. Now, the whole country is in a bit of a mess because of these defaulting loans.
These loans never should have been made. Many times a lender will take a loan that was designed for an investor and give it to an unqualified borrower. These investor loans usually offer very low payments up front, but then after two or five years, they explode into much larger payments. For someone buying a house to renovate and resell it, these make sense. For someone buying more house than he/she can really afford, they are utterly irresponsible.