In legal terms, a mortgage is a transfer of an interest in real estate, which is given as security for the repayment of a loan. In other words, a mortgage is a loan that is extended by a creditor to a borrower who wishes to purchase a piece of real estate. It is then secured by a real estate lien being placed on the property by the party that extended the loan. The party that typically issues a mortgage is generally a bank or other financial institution.
A subprime mortgage is a specific type of mortgage loan that carries a higher interest rate than the prime lending rate that is commonly associated with standard bank loans. As such, subprime mortgages are typically offered to borrowers who have lower credit scores and generally are not able to qualify for a normal or lower loan rate.
When issuing a subprime mortgage, lending companies are allowed to charge prospective borrowers a higher interest rate due to the borrower’s lower credit score and the risk of repayment. In other words, because subprime mortgage loans pose an increased risk of repayment on the lender, the lender is able to charge a much higher interest rate.
There are many pros and cons of subprime mortgages. Subprime mortgages do serve an important purpose of providing a way for an individual who may be otherwise excluded from the credit market or loan market to obtain an opportunity to make a larger purchase through a loan.
Due to the nature of subprime mortgages, both lenders and borrowers should exercise caution when entering into a subprime mortgage arrangement. In some cases, subprime mortgage lenders may try to take advantage of persons who are in financially vulnerable positions and engage in predatory lending practices.
For instance, subprime mortgage lenders may target susceptible borrowers, such as uneducated borrowers with lower credit scores, and offer them loans at abusively high-interest rates or unreasonable loan terms. The lender may even do this knowing that the borrower will most likely default on the loan so that they may foreclose on the borrower. These are typically known as subprime mortgage scams.
Then, if the borrower defaults on their loan, the subprime mortgage lender has the legal right to foreclose on the property that was subject to the loan and have it sold to reduce the debt that is owed to them. Further, there may be additional penalties for defaulting on the loan.
What Is “Predatory Lending”?
As mentioned above, one risk of obtaining a subprime mortgage is that borrowers are often targeted by predatory lending practices. Predatory lending refers to a broad range of lending practices that involve a lender engaging in deceitful, unfair, and/or fraudulent actions.
For example, a subprime mortgage lender may issue a subprime mortgage loan at a higher interest rate and also intentionally hide or fail to disclose certain loan fees. Another example of a predatory lending practice is a lender issuing a short-term loan and charging the borrower an abusive interest rate or high loan fees.
No borrower, regardless of their credit score or the loan that they seek, should be subjected to predatory lending practices. As such, you may be a borrower who believes you are subjected to predatory lending practices, or you may be considering applying for a subprime mortgage. If so, you should first speak with a mortgage lawyer before signing a subprime mortgage agreement.
It is important to carefully review any mortgage lending agreement before signing the agreement in order to reduce the likelihood of legal issues arising. Further, you should always feel free to ask questions and voice any concerns that you might have with the mortgage lender, such as concerns about predatory lending.
What Are the Hidden Risks of a Subprime Mortgage?
As mentioned above, subprime mortgages often contain numerous risks to both the lender and the borrower. In fact, subprime mortgages were one of the main causes of the Great Recession in 2008. Once again, subprime mortgages are meant for people who do not qualify for a prime-rate mortgage. This means that subprime mortgages are targeted towards people who may have a history of timely paying back loans or purchases made on credit.
Because of this, a subprime mortgage lender has the right to charge higher interest rates in order to provide an added incentive for the borrower to pay on their loan timely. Additionally, because subprime mortgages are more controlled as a result of the housing crisis and great recession, finding a subprime mortgage lender may be difficult.
Additionally, there may be terms within a subprime mortgage agreement that allow for the lender to increase the payment terms or the interest rates during the period of the loan. Finally, there may be acceleration clauses that allow for a lender to quickly engage in foreclosure.
What Can I Do if I am Unable to Pay off a Subprime Mortgage?
As a borrower, if you are unable to pay off a subprime mortgage, there are many options available to you that may prevent the foreclosure process or assist you with payments. As a result of the 2008 financial crisis, lenders were prompted by the federal and state governments to change their lending policies. As a result of the change in lending practices, subprime mortgage borrowers have different options regarding paying or delaying payments on a subprime mortgage, including:
- Modify the Terms of the Mortgage: Many lenders would prefer to negotiate with the borrower and get some of their money back rather than lose money on a foreclosure sale or bankruptcy.
- As such, many lenders are usually willing to work with borrowers to renegotiate the terms of a subprime mortgage to allow the borrower to lower their payments and get caught up.
- Additionally, there are also government-sponsored programs that borrowers can register for, like Fannie Mae and Freddie Mac;
- Loan Forbearance: In some cases, a subprime mortgage borrower may qualify for loan forbearance. A forbearance can be used to delay mortgage payments for a certain period of time, allowing a borrower extra time to catch up with their loan repayment schedule;
- Foreclosure: In some cases, a borrower will not be able to avoid foreclosure and may just walk away from their mortgage or loan.
- During the foreclosure process, the lender or creditor will take possession of the borrower’s property, sell it at auction, and collect the proceeds to pay off the borrower’s loan; and/or
- Deed in Lieu of Foreclosure: A deed in lieu of foreclosure is a tactic used as an alternative to foreclosure. It allows a borrower to give back the deed to their home to the lender in exchange for being released from the mortgage.
- It is important to note that a borrower must first ask their lender if they would be willing to accept the deed in lieu of foreclosure, as lenders are not automatically required to do so.
What About Student Loans?
There are many financial professionals who believe private student loans resemble subprime mortgages. This is because comparing the definition of a private student loan to that of a subprime mortgage is very similar. Both loans are offered to persons who would otherwise not qualify for a prime-rate loan. Further, there have been numerous predatory lending cases involving student loans and subprime mortgages.
However, unlike subprime mortgages, student loan payments can be delayed through deferments and forbearances. Further, if a borrower fails to make payments on a subprime mortgage loan, the lender can either take their house or the borrower may be able to declare bankruptcy.
In contrast, student loans must be paid in full and are rarely ever discharged through the bankruptcy process. A student would have to demonstrate severe hardship in order to discharge private student loans through bankruptcy.
Do I Need a Lawyer if I Have a Subprime Mortgage or Thinking About Getting One?
If you have a subprime mortgage or are thinking about signing a subprime mortgage agreement, it is in your best interests to first consult an experienced mortgage lawyer. An experienced mortgage lawyer will be able to help advise you as to your best legal options for dealing with subprime mortgage issues. These issues can include assisting you in negotiating a fair debt settlement plan with your lender or assisting you in filing for bankruptcy.
Additionally, an attorney will also be able to represent your interests in court should your lender initiate a civil lawsuit against you or should you have a fraud or predatory lending case against your lender.
