Debt Consolidation & Florida Credit Counseling

The role of adjustable rate mortgage in Florida sub-prime crisis

As the trouble in sub prime mortgage crisis began, many mortgage lenders started to worry how to overcome the worst that is yet to come. The sub prime crisis actually began in year 2006 when mortgage lenders use to lend liberally even to individual who is having bad credit. Housing market boom that assured that lending to individuals with bad credit not risky because if the individual defaults on mortgage payments then the lender can takeover the property and put it for sale in the market. With increasing home price very fast from month to month, lenders could easily recover the whole amount due on with mortgage.

This scenario was actually reversed when the interest rate were increased with rise in inflation to control the liquidity in the market. With rise in interest rate, home owners who were availing adjustable rate mortgage also increased their interest rate on their mortgage. As interest rate increased, the monthly payments on mortgage were also increased which was not affordable by an average borrower. Due to his un affordability, defaulted on mortgages.

As many home owners are defaulting on mortgage, lenders brought huge number of home to foreclosure. With increase supply of home into the market and inability of home to afford for higher interest rate went back. As there is lesser demand for homes in market with increased supply, home prices started to decline in the market which resulted in sub prime crisis.

Florida is one of the top ten states that is filling high number of foreclosures and this crisis not only impacted mortgage originators but also spread across to all the sectors that is related like home builders, real estate agents and manufacturing units that depend on the housing market. It also impacted the insurance companies that cover the mortgages, collateral mortgage obligations or securitized mortgages pools etc

But this adjustable rate mortgages often has a built in protection component against rapid increasing or decreasing in borrowing costs and they are called as “caps” in mortgage industry which puts a limit on interest rate setback in any single year and for life time. For example: if rate on mortgage in starting is 7 percent, then the annual rate that can be increased limit is 2 percent and for life of the mortgage is 5 percent. It means the adjustable rate mortgage interest rates can go up to a maximum of 12 percent in the life of mortgage.

Even with these safety components are in place, federal government regulated lenders mortgage lenders to educate borrowers as much as possible and collect also advised to increase the amount of information collected from a borrower. This is important to know information about the borrower because lender must know the ability of the borrower is able to mitigate the risk of adjustable rate mortgage. Therefore the lender must check the capability of the borrower whether the borrower qualifies for the loan at higher rate of interest rates to mitigate the risk of foreclosure.