The Subprime Mortgage Crisis

In recent years, real estate values have skyrocketed.  And housing affordability has plummeted to near record low levels. 

At the same time, more and more loans have been extended to borrowers with less than optimal credit histories – known as subprime borrowers.  These loans often carry a higher interest rate and offer incentives that look good on the surface, but carry hidden costs.

These exotic mortgages – such as interest-only mortgages and adjustable-rate mortgages – often allow borrowers to exchange lower payments during an initial period for higher payments later.  However, many subprime borrowers find themselves overextended and unable to afford the loan when the time comes for higher payments.  This leads to foreclosure and bankruptcy.

The steep rise in foreclosures has led several large subprime lenders to file for bankruptcy or go out of business.  And its impact has been felt by consumers and in financial markets around the world.

The Cost to Consumers

The increased number of subprime loans approved in the past decade have imposed major costs on consumers and significantly contributed to the recent surge of mortgage defaults and home foreclosures. 

Overheated real estate markets, such as in parts of California, Florida, Nevada and Arizona, have been hit particularly hard.

In California, the percentage of adjustable rate subprime mortgages in delinquency more than doubled – from 5.4 to 11.5 percent – between from 2005 to 2007.  And the number of adjustable rate subprime mortgages entering into foreclosure more than quadruped – from 0.7 to 3.3 percent – during the same time period.  

Responsible Lending Standards

I believe that all Americans have a right to safe and decent affordable housing opportunities.  And it is important to support initiatives that will help more Californians achieve the American dream of owning their own home. 

Congress must be mindful of how lending standards impact Americans.  We’ve seen what can happen as a result of risky mortgage lending.  That’s why it’s important to prevent irresponsible lending practices from continuing.  We must take steps to ensure that borrowers make educated decisions and that their ability to repay is properly considered when loans are approved. 

Tips for Borrowers

Three basic steps to better protect yourself from default and foreclosure:
  1. Contact your lender as soon as possible.  Many lenders will provide options to help borrowers through difficult financial times.  Be proactive and take action early to prevent further problems down the line.
  2. Inform yourself about ways to avoid foreclosure by visiting the U.S. Department of Housing and Urban Development (HUD) website.
  3. Contact a housing counselor approved by the U.S. Department of Housing and Urban Development, who can help you understand the law and your options, organize your finances, and represent you in negotiations with your lender if you need this assistance.  Find a list of approved housing counselors in California here.  
Additional Resources:

  • If you or your spouse is on active military duty, visit the Veterans Administration website to learn about how you may qualify for a reduction in your mortgage interest rate resulting in lower payments.
  • The Federal Housing Authority (FHA) works closely with customers who have FHA-insured loans. You may call the FHA at (800) CALL-FHA to for further advice about how to manage your mortgage.
  • The Internal Revenue Service provides helpful answers to questions about foreclosure and debt cancellation on the IRS website.
  • Further information about mortgage products and resources in California is available here.

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