What are the effects of the subprime crisis?
The subprime crisis is still topping headlines as more than two million subprime adjustable rate mortgages continue to reset at much higher rates. After enjoying a few years with low “teaser” rates, borrowers who took out hybrid ARMs in 2004 and 2005 may see their monthly mortgage payments increase by 35 percent or more. Many of these borrowers had poor credit and limited means at the time the loan was obtained, and are expected to struggle with the demands of higher payments. This situation is the definition of “subprime crisis” and the blame for current record setting foreclosures seen around the nation.
In late June, regulators from the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration set forth new guidelines to aid troubled borrowers and prevent a repeat of the current crisis. The guidelines will tighten loan underwriting standards and require evidence that the borrower can make payments over the life of the loan. The guidelines also require lenders to notify borrowers when a reset is coming and grant them at least 60 days to refinance.
Although the Federal Reserve and other regulators have been complimented for their efforts, lawmakers will likely continue to push for further tightening of loan underwriting standards. Therefore, borrowers will continue to see the effects of the subprime crisis as the situation unfolds.
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