You’ve heard the term “sub-prime mortgage melt-down”, but I bet you have never been told what it means. Basically (about 3-4 years ago) there were a number of banks that developed “b” or “sub-prime” lending divisions. They thought it would be a great way to get a larger share of the mortgage market, while mitigating their risk and making lots of money. The theory was this – banks are picky, they choose guarenteed loans and they don’t charge much for interest, so they can’t afford to take on risky loans. But, if you charge lots in terms of rates and fees you can afford to have the odd loan not repaid because your profits will be so high. Anyways, the banks weren’t the only ones jumping into this market. There were alot of other private companies doing this too.
Great, how does this affect you? This affects you because you are funding these companies. You see, many companies were started with their primary source of funds being from pension funds. The idea was to take the money that everyone pays into their pension programs with, invest in mortgages, make a killing and pay the pension funds back with loads of cash.
Now, not everyone is willing to take a mortgage at 10%, which means that those who were borrowing these funds weren’t exactly “bank worthy”. Most of them were self employed (often very recently), many had no income proof, many did not file taxes, and many did not have any net worth or down payment. What this meant was that these people were borrowing funds based on the hope that they would make enough money to pay their mortgages. And, to make matters worse, there were often large fees charged to the borrowers since the loan was running on hope.
So, naturally, everyone that thought they were going to strike it rich (as a self-employed person) did not end up doing so well and were having trouble paying their mortgages. Not only this, but when you buy a house with no down payment, and your mortgage is more than house value because the lender fee is added on to the mortgage there is not a really high incentive to spend your last dollar on your mortgage payments. Needless to say the whole system crumbled, houses were being foreclosed on all over the place.
So, that is what the mortgage melt-down was, and how it affects you is that there are likely going to be alot of pension funds that are a little short on cash after this event.
See http://www.mortgagebrokercalgary.info/november-8-14-2010/why-the-sub-prime-mortgage-crash-was-good/ to see why the mortgage melt-down was actually good.
Trevor Hickey, B.A.
Concord Mortgage Group Ltd.
#107 – 1905 Centre Street NW
Bus: (403) 290-1990
Cell: (403) 860-8738
Top desired search term for this post: Calgary Mortgage Brokers
Popularity: 2% [?]