Home loans: Sub prime loans

Sub prime loans have proved to be a contemptible piece of business. The stigma of real estate market collapse is essentially linked to these two words to a great extent. Every report on the misery caused by collapsing markets has reminded us about these loans. Every analyst and economists have uttered these accusations many times over the last few months. Even though there has been hue and cry about sub prime loans there are very few out there who can exactly explain what sub prime lending is all about. Whatever the explanations sub rime loans are impending disasters.

Many people believe that a loan with 100% purchase price provisions and no down payment would qualify as sub prime loans. Another type of loan that falls into this category of speculation is one where no payments have to be made towards principle during the early years. In reality both these types of loans have been given from a long time. The zero down purchase loan is provided to veterans from 1944. Many ex servicemen have benefited greatly from them. They do not pose great risks as is assumed to be. The practice of not paying initial principle payments have been going on from 1930 and is the most commonly practiced method of repayment.  The typical FHA loan is one just like it. Many Americans have acquired homes through this program. The 30 year fixed rate loans also provides scheduled payments of first five years, almost ninety five percent of principle remains unpaid. After ten years a balance of eighty five percent is allowed. Most of the payments in the early years go towards the interest and it is only later that money is directed towards repayment of principle.

The line between sub prime loans and ordinary loans seems to be blurring already. Thus the cub prime abuses seem to have no concrete base.  Therefore where is the abuse in home loans?  Thus we come down to the basic of home loan financing i.e. buying of homes beyond a purchaser’s financial ability. This is what made sub prime lending a perversion. The loan industry went berserk and incorporated many different devices for financing houses. They literally went out of their way to encourage people to go for houses and loans above their means. Loan industry made it easier to get a loan whatever the situation the borrower was in. they allowed bad credit scores, low initial monthly payments, unreliable credit history, rate of interest minimal in the beginning scheduled to change later etc, were all allowed by the lenders. They all culminated in calamity that the world is witnessing today.

But in all this the people to blame are the mortgage lending companies who went beyond their means to extend loans. They considered themselves to be safe from future defaults and payment failure. Loan approvals rested with these people and they just complied with nonsensical data.  Loan lending provides high fees and this factor and greed together led officials to create and extend more loans. Thus here lie the real culprits.