There has been a lot of press coverage over the recent mortgage defaults in the US housing Market. Although, mortgage defaults are primarily occurring in the sub prime (adverse mortgage) mortgage sector, defaults are also occurring in other areas. These mortgage defaults are causing banks and investment trusts to wipe off billions of dollars, due to bad credit. Why are mortgage defaults increasing so much?
Common Reasons for Defaulting on Mortgage.
1. End of introductory Rate.
A feature of the sub prime lending market in US was that many new mortgages were offered at an introductory rate for the first 2 years. This means that the mortgages look suspiciously attractive. However, it encourages many people to take out a mortgage they are later unable to pay. At the end of an introductory rate, mortgage payments can often double overnight.
2. Aggressive sales of Sub prime mortgages
Many have criticised the way sub prime mortgages have been sold, often to vulnerable people. Mortgage salesmen have often been paid on a commission only basis. Thus, they have sought to sell mortgages wherever possible. In the process, they have often ignored the financial capacity of the homeowners to pay back, especially if the interest rate climate was to change.
3. Higher Interest Rates
Rising interest rates can increase the cost of a mortgage and make it much more than the initial mortgage repayment. US and UK interest rates have increased in recent months, due to concerns over rising inflationary pressures. In the US, upward pressure on interest rates is also due to the large twin deficits (current account and budget deficit. This is especially a problem for those who took out a mortgage when US interest rates were 1%, or in UK when interest rates reached a low of 3.5%
Higher interest rates are also a problem for those on fixed rate mortgages when they come to the end of their mortgage term.
4. Loss of Income / Job.
Without a steady income there is little scope for managing hefty mortgage payments. This eventuality can be insured, through mortgage protection insurance. For a monthly premium you can gain insurance for the necessary mortgage monthly payments. Worth considering if you have uncertainty in your current job. However, at the moment, this isn’t the primary reason for mortgage defaults. But, if the recession in the US housing market was to spread to other areas of the economy, it could make the problem a lot worse.
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3 comments ↓
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It should be interesting to see what happens to the many loan officers and mortgage brokers homes. Many of them bought up property over the last few years, and will likely be unable to make their mortgage payments as things worsen.
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