The record-low mortgage rates of just a couple of years ago made it easier for more people to buy a home - even those who might not have qualified for standard mortgages. But now, some homeowners who have higher-risk "subprime" mortgages are defaulting on their loans, and this could play a major role in your financial future. Ray Hennessey, Editor of SmartMoney.com, offers his advice.
Not everyone is familiar with the term "subprime mortgage". According to Hennessey, these were the mortgages everyone was talking about during the housing boom a few years ago. "These were the people who were really getting a bigger house than they could afford because mortgage rates were so low... [They] wouldn't qualify for a traditional mortgage... under a normal interest rate environment," says Hennessey.
Many of these "subprime mortgage" holders are beginning to default on their loans, and it has economy experts - and home owners - very worried. "You can't make the mortgage payment, and you run the risk of losing your house," says Hennessey. Homeowners who have subprime mortgages feel the most direct effect.
Lenders, such as banks and finance companies, are also affected by "subprime mortgages". "General Motors has a big mortgage... through GMAC. There's a lot of talk in the stock market that they're going to have higher than expected subprime mortgage breakdowns," says Hennessey. That could affect their stock, which in turn affects the DOW Jones Industrial Average and other aspects of the economy.
But the worst part, according to Hennessey, are the hedge funds. "A lot of the hedge funds are holding the subprime papers that are now being defaulted on... this was the riskiest of the mortgage paper to take," says Hennessey. If a major hedge fund were to collapse due to default mortgages, it would affect the stock market and the rest of the economy as well.
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By Erin Petrun