Life Gets Easier for Bad Credit Loan Holders

The bugle has sounded and the cavalry is on the way for bad credit loan holders. Following a rash of foreclosures and loan defaults, mortgage companies have now begun negotiating easier terms with subprime borrowers.

No one could have predicted the breadth and depth of the subprime mortgage crisis. From realtors to mortgage banks to home improvement contractors, everyone in the housing industry has felt its wrath. The entire economy has slowed, as well, as the crisis has rocked investors and shaken consumer confidence.

While few could have anticipated the fallout from lax lending guidelines for bad credit loan holders, the mortgage industry is starting to react.

Revisiting the ARM

The crux of the subprime crisis occurred with adjustable-rate mortgages (ARMs). These loans include a low introductory interest rate, designed to entice borrowers to take out a mortgage. The product may have been initially conceived as a way to compel borrowers with good credit to act when the interest rates on fixed-mortgages were high, but unfortunately, the low teaser rates also proved tempting for another crowd.

Subprime borrowers, desperate for cash, treated their home equity like a money tree. Because home values had experienced an unprecedented increase in appreciation, bad credit loan holders routinely took out ARMs whenever they needed a shot in the arm of extra cash. They had low monthly payments and plenty of new equity to work with, a formula that served them well for several years. Then the bottom fell out.

Crash, burn...and reborn

When home values began to plummet, subprime borrowers suddenly couldn't find enough equity to qualify for a new mortgage. As their ARMs neared the end of the teaser rate periods, the borrowers couldn't get a new loan. Defaults and foreclosures soon followed, and the housing market found itself in a tailspin.

To help subprime borrowers, the mortgage industry has begun revisiting the bad credit ARM. Terms have been modified and rates frozen-some of them for up to five years. Industry data indicates that 250,000 borrowers received new repayment plans in the third quarter of last year, and more are on the way. There's even talk of expanding the program to help borrowers with non-subprime adjustable-rate loans.

Mortgage lessons learned

Around these unprecedented actions, debate will surely rage. Who will ultimately be held accountable for the subprime crisis? Without a doubt, there's plenty of blame to go around. Lenders have been greedy in the search for more loans, and their lowered lending standards have proven disastrous. Borrowers have also ignored the fundamental laws of money management, routinely borrowing more than they could afford.

In the long run, it's difficult to determine what will be the outcome of the industry's emergency actions. But the overriding concern is focused on the short-term. The bailout is designed to help an industry that's taken on serious amounts of water, and it's in everyone's best interest that this effort keeps the mortgage market afloat.