During the years 2006-2008, subprime mortgages were a major economic crisis in the United States, which even came close to affecting many other countries. There are still many economists and experts who remember them, and who warn of the danger that they will return, under other names, thus altering the economy of a country.
That's why, if you want know what subprime mortgages are, the conditions they offered and what happened so that now they are seen as a great danger, here we have compiled all the information about it.
What are subprime mortgages
Subprime mortgages emerged in the United States. In fact, they were a "legal" figure within his loan and credit system, and they were focused directly on mortgages. In this country, there were two types of mortgages: prime, which are those granted to people with a solvency greater than 660 points (according to their work, quality of life, documentation, possibility of returning the money, etc.); the subprime, which were those that were awarded to people who did not reach 660 points. These also received other names such as junk mortgages or NINJA mortgages (No Income No JOr or Assets, translated as mortgages for those who have no income, work or are not active).
Thus, subprime mortgages were those that were given to people who had few resources, that they barely had an income, or even no job. In this case, it was very risky to grant a loan to someone who could not pay it back, and so they decided to increase interest rates.
Something to keep in mind is that these mortgages were not bad, they were actually the same as prime mortgages, but these, because the owner was not the "best person to trust money", conditions were imposed much tougher.
What are the conditions of subprime mortgages
And what were those conditions? Subprime mortgages were the resource that many families used for their homes. The problem is that these posed a high risk for the banks. Perhaps one or two not, but entities began to accumulate more and more of them, and a large part of them began to fail.
To begin with, these types of mortgages were reserved for profiles that did not reach the solvency that was required to give a mortgage. And it is that they could be accessed by people who did not have work, who had minimal income, or who were not stable nor did they have properties in their name that could "guarantee" them. In other words, anyone could take out a subprime mortgage even without having a job, money, or property.
Due to the above, and because it involved a high risk transaction, the interest rate was the highest, because there was a great risk of default. A) Yes, the interest rate used to be between 1,5 and 7 points above what is considered normal. But it did not end there.
As well there were more commissions, not just brokerage brokers, but others that the banks themselves imposed and that raised the amount that had to be returned to a very difficult to return for this group.
Finally, the mortgage was granted financing more than 80% of the house, but it was easy to have the bank itself make you a 100% mortgage and even take care of the expenses.
In other words, it was a very "juicy" mortgage for those who needed it. But what about banks?
Subprime mortgages and banks
In the case of banks, it seems almost impossible for an entity to dare to do something like that, right? And yet in the United States it happened (although it was also what caused the financial collapse afterwards).
But yes, banks were delighted with these types of mortgages, and all because they used the figure of "mortgage bonds." They were a figure in which they put those mortgages and sold them to investment funds. That is, they were supported by others who, in exchange for these bonuses, obtained a "reward." And everything seemed to be going well ... until it wasn't.
The story of a great crisis
In 2000, subprime mortgages were a "bargain." A person, without income, without stable work, without property could agree to buy a house because the bank gave him a mortgage, sometimes 100%, sometimes 80%. But it was his. All you had to do was pay a monthly fee. And everything went well. In fact, According to data from the Institute of Stock Market Studies, in 2006 American financial institutions had made a lot of money with this banking product. But from that year on, things turned for the worse.
And is that many people stopped paying the fees, and that caused them to give up their homes. The problem was that these could not be resold more expensively, because the price was already at the top, and they were even starting to fall. So the banks had lots of houses and debts. In addition, those who had bought the bonds began to see that they were not going to receive anything, on the contrary, they were losing all the value they had invested. And that triggered the funds and banking entities to begin to have liquidity problems, to go bankrupt… Which caused the well-known financial crisis of 2007-2008.
Are there junk mortgages in Spain?
The big question for many. As such, subprime mortgages were America's thing. But you don't have to walk very far to see that, similar figures have also existed in Spain.
In fact, almost at the same time as in the United States, in the 2000s, the so-called mortgage loans without collateral began to come out from the banks. Their conditions were very similar to the subprime and yes, the consequences were also the same: the economic crisis from which, right now, Spain has not yet managed to get out.
What now?
We cannot tell you that there are no subprime, junk, NINJA mortgages or whatever you want to call them today. The truth is Yes, they can exist, called in another way, and with very similar conditions. However, many banks have learned their lesson and now accessing a mortgage is much more difficult than before. In fact, although banks are more open to lending money, they “keep their backs” with the guarantees or figures that guarantee that they will get the money back.