Thursday, July 26, 2007

Trouble in the US mortgage market

The riskiest segment of the U.S. mortgage market, which serves borrowers with poor credit histories at high interest rates, has seen rising default rates in recent months.

'Subprime' Mortgage-- are "no doc" loans. That's when you get a loan without giving the lender any documentation about your income. There are also "low doc" loans, or when you get a loan with just a little paperwork about your employment and income. The number of non-traditional loans extended with low or no documentation jumped by 20% (to 65%) between 2003 to 2005. While subprime mortgages have spread credit more widely and helped more people buy their own homes, critics contend a hot real estate market encouraged lenders to get more aggressive and offer increasingly complicated terms that borrowers did not always fully understand. These risks are being exposed as the housing market cools.

Some analysts believe the crisis in the subprime mortgage market could boost the chances of the Federal Reserve cutting its target for benchmark interest rates. One of the factors driving the poor performance of subprime mortgages has been a series of interest rate increases by the Fed.

Even if interest rate cut might be coming, it may be too little, too late for as many as millions Americans who could lose their homes in the subprime shakeout.

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