Identifying the problem

When Congress stepped in to help both lenders and borrowers involved with subprime mortgages, they were tackling one of the biggest financial problems in the country. A “subprime mortgage,” as they are known, often offers borrowers teaser rates or rates that start off extremely low, sometimes as low as just one percent, but often increase dramatically after a set amount of time. This leaves many borrowers searching for a way to keep up with payments and many lenders hunting down missing money. After analyzing the situation, Congress suggested that lenders must now speak to borrowers beforehand and spell out all the details of subprime mortgages, explaining exactly how the mortgage will increase terms later and affect the borrower.

Establishing new mortgage standards

So, aside from alerting borrowers how the increases in the interest rate will affect them, what else did Congress suggest to borrowers and lenders to help subprime mortgages become less of an issue in America? Well, for one, Congress analyzed why so many borrowers were being approved for subprime mortgages and what they found was astounding. Many lenders were approving mortgages to people with bad credit. However, they were doing so only after finding out if they would qualify to pay off the mortgage at the teaser rate. In other words, many of the borrowers being approved for mortgages could make payments when the low-end rate was applied to their mortgage but could not afford to do so once the rate went up eventually. That said, many of these people would not normally qualify for a mortgage but were able to do so and subsequently found themselves in massive amounts of debt. Congress encouraged lenders to approve only those who qualified at the adjusted interest rate as well as the teaser rate. This would help both the lenders and the borrowers at the same time.

Seeing consumer results

By making these suggestions, Congress was able to address a very important issue in this country: Stopping lenders from approving mortgages for those who are not necessarily equipped to make mortgage payments after a year or two. Subprime mortgages, contrary to popular belief, affect both the lender and the borrower. Sure, it may not seem like a big deal to a lender when he or she is owed thousands of dollars by a borrower. They will see their money eventually, right? Unfortunately, many borrowers are being forced to declare bankruptcy as a result of subprime mortgages. By establishing these new standards, Congress is hoping to stop this trend immediately and to help both the lenders and the borrowers to stay out of debt as they both move forward.

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