The Problems Caused by Sub-prime Mortgages. There has been a lot of talk in the news lately about sub-prime mortgages, the credit crisis, and a possible recession caused by these issues. For those who don't work in the real estate, banking, or mortgage industries, are wondering just what is meant by all these different issues and how exactly they're related, we can help. There is a very simple explanation as to what sub-prime mortgages are, how they led to the current credit crisis, and how this situation is affecting the U.S. economy overall.

The term "sub-prime mortgages" applies to those mortgages that were approved for those whom many banks would have turned down. This may include those with a spotty credit history or who earned less than most banks would think is the minimum salary requirement to be eligible for a mortgage. Some years back, many smaller mortgage companies sprang up with more relaxed requirements for those applying for mortgages, and the term sub-prime mortgages began to be used for these applicants.

Normally mortgages rates are based on the prime rate which is determined by the federal government. A percentage point or two is added to the interest rate for standard mortgages for the lending companies' profit margin. This mortgage interest rate could increase or decrease over the life of the loan based on the prime interest rate fluctuation (variable mortgages) or the mortgage interest rate could be locked in as a specific rate (fixed mortgages).

Sub-prime interest rate mortgages were given with interest rates below the prime rate with an automatic increase to the standard rate usually within two years. People could now qualify for the new lower rate that could not have qualified for the standard rate. Home owners believed they would be able to afford the new rates within two years or they could simply refinance to a new mortgage hoping the prime interest rate would continue to drop.

Well, the prime interest rate went up and now home owners were faced with mortgages that increased two, three or even four hundred dollars a month with no way to qualify for a new mortgage. Could you pay four hundred dollars more for your home mortgage and not feel the bite?

One thing to remember when trying to understand how these sub-prime mortgages affect the economy overall is that rarely does a mortgage company or bank itself actually carry mortgages as debt themselves. Typically what they do is turn around and sell those mortgage

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