The sub-prime mortgages (the ARM type) have been largely blamed for the foreclosure crisis raging across the USA today with ripples being felt across the globe.

The great American dream from the beginning has always been to own a house. But the prime or conventional mortgages left out a large section of society. To make up for the loss, the sub-prime mortgage was introduced to cater to the have-nots. The principle behind the move was laudable but the consequences turned out to be dangerous. The country is on the verge of recession and stocks across the globe are tottering. Banks are battered and heads are rolling. The foreclosure problem has taken on such magnitude that it is affecting all – the borrowers, lenders, communities and governments at all levels. Politicians are treading carefully with an eye to the vote banks.

The prime mortgage is also known as the conventional or traditional mortgage. Before a loan applicant is sanctioned certain things are looked in to – the income supported by proof, the capability of that income to steer the borrower with mortgage payments and the value of the house. Above all the credit credentials of the loan taker was taken into consideration.

To fill in the vacuum the sub-prime mortgage came into play. All rules were thrown to the winds while the corridors of power turned a blind eye. Practically anybody with a pulse was given a loan. Credit history was not checked. Income proof was not checked. The value of the house was falsely increased to facilitate the sanction of bigger amounts. There was aggressive peddling of loans. The targets were the minorities, seniors and those not conversant with English. They were persuaded to take the loans in their own language but made to sign papers in English. They signed for one amount but were given less. Lenders and agents snapped up the balance. Huge commissions were played around with. Hedge funds poured in. Money began to flow. Everybody now wanted a house. This led to an abnormal rise in demand. It kicked off frenetic house building activity. Foreclosures became inevitable. But nobody gave it a thought drunk in the feeling of living for today-only!

Borrowers are being blamed for having a hand in the foreclosure debacle. There is a natural tendency for wanting to improve one’s standard of living. So it was hard to resist offers that promised the sky. In many cases down payments were either waived or arranged through second piggyback mortgages. The initial monthly payments were minimal with interest only commitments. The borrowers were told that the interest was floating and might rise or fall. Cleverly couched words were used to convince them that it would more likely fall and if there were an increase it would be slight. The phenomenal rise in property values lead to a complacency that within a few years the house could be sold and the loan paid off after netting neat profits. But the opposite happened – a foreclosure crisis.

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