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The good, the bad, and the ugly. Sounds like a title for a good movie, but this also fits what has happened in the mortgage industry in the past few years. Many people desired to be homeowners, and that dream was made a reality by the subprime mortgage market. People were put into homes they couldn’t afford all in the name of “the great American dream.” There was a price to be paid, however, because these buyers were granted loans called Adjustable Rate Mortgages (ARMS) that started out with lower interest rates which in turn, reduced the monthly payments. The number of years the rate was guaranteed  was typically 2, 3 or 5 years. When the term expired it went to a higher interest rate which resulted in higher payments. To add insult to injury, the economy cratered and many people have been left unemployed with no way of making their mortgage payments.

How did this happen?

The growth in subprime lending represented an evolution of the credit markets. Two decades ago subprime borrowers would typically have been denied credit, as lenders were restricted by usury laws that prevented them from charging rates high enough to compensate them for the risk. However, the adoption of the Depository Institutions Deregulatory and Monetary Control Act in 1980 eliminated rate caps and made subprime lending more feasible for lenders.

It wasn't until the mid-1990s that subprime lending began to gain speed.  Rising interest rates in the mid-1990s led to declining origination volumes and intense financial competition in the prime market. Adjustable-rate mortgages were heavily sold by mortgage brokers and bankers. Many borrowers looking for low payments eagerly signed the loan papers. The ARM mortgages which offered low introductory interest rates and low payments equaled the “ Land of Opportunity” for some prospective homeowners at that time. Of course, the downside to all the ARMs sold during that time did not become evident until the rates started adjusting and homeowners saw their monthly payments increasing.  What had looked like a great opportunity became nightmares for many.  It's left politicians and lawmakers fighting over who to blame. The word foreclosure has become the current day buzz word.