In this section, we will summarize what the subprime mortgages of the United States were and why they were so controversial, although we noticed that it was a very complex situation. To understand it well, we must first know that the US mortgage system is different from Spain’s. There, the mortgages are categorized according to the profile of the applicant: the entities have a rating scale and award points according to the level of income and solvency of the client.
Since only those who fulfilled certain requirements could obtain mortgages, in the early 2000s the lenders saw a gap in those people who did not meet the minimum requirements but did not pose a risk to them, since the money came from private investment funds. So, to generate more income, the profile of people who could get a mortgage was broadened. The normal thing was to have a rating above 800 and subprime mortgages were granted to people who qualified below 620 points.
Little by little, banks accumulated a large number of subprime mortgages. So that they did not affect their balance, they decided to sell them to Wall Street investment funds. To place all those subprime mortgages, some with the highest delinquency rate were grouped in the same package with some safer ones. Thus, the mortgage packages seemed easier to sell and perceived as an attractive investment. In addition, nobody believed that the price of the house fell, so if the mortgage was not paid, by selling the house they would recover the investment.
The packages with lower risk were sold to institutional investors such as insurance companies, pension funds, banks and foreign governments. On the other hand, the mortgages with the highest risk of what Wall Street banks were left with. These mortgages, having a higher delinquency rate, also applied a higher interest, which generated more performance in the beginning.
However, this situation was not sustainable and investors began to perceive alarm signals: the interest on mortgages was increasing, but so was the mortgage delinquency, so they did not earn money with them.
Finally, those who had applied for all these subprime mortgages could not continue to face the debt and had to return the house. The rest of the history we know: nobody wanted to predict what would happen and the housing bubble burst.
The term subprime does not refer to the type of mortgage granted, but to the rating that these “investment packages”. The term “prime” means “excellent” in English, rating awarded to investments with maximum guarantees. Qualifying these mortgages as subprime was a way of indicating that although they did not have the same quality, they did not represent a significant risk.
Characteristics of junk mortgages
In the United States, banks only lent to a solvent mortgage profile, so they could not grant mortgages to people with economic situations that were below a minimum threshold. In this way, they delegated the sale of mortgages to financing entities or brokers. They did lend money to people without stable income and, in many cases, they did not even have an indefinite or full-time work contract. For this reason, the characteristics of a subprime mortgage were different :
As the risk of those who lent the money was higher, the interest was higher, in general, between 1.5 and 7 points higher.
They used to include more commissions than for a normal mortgage.
Financing exceeded 80 %, sometimes even more funding could be obtained than with a 100 mortgage since the applicants did not have enough savings to open the mortgage.
What would a good mortgage be like?
In order not to repeat the mistakes of the past and the banks to grant mortgages again, we define below the characteristics that a good mortgage should have:
An interest that suits what the market offers at that time. Currently, for a linked mortgage we should not accept more than one interest of Euribor + 1.25% for variables and 3% for fixed. If we do not want to link with the entity, the interest should not be higher than 2.50%.
A financing that does not exceed 80%. In this way, the risk for both the bank and the mortgaged is much lower.
Without abusive clauses. The contract should not include either the floor clause or very high late payment interest. Justice is trying to end the abusive clauses that harm the mortgaged and also do not understand what they are.
With the flexibility of payment so that the mortgaged can comfortably assume the installments and in case of any unforeseen event, the bank provides options so that it does not have to end up seizing the home.
Mortgage profile now
The garbage mortgages have disappeared from the catalogs of the banks, which have in fact hardened their requirements so as not to suffer the wave of defaults that occurred during the hardest years of the crisis. Therefore, if we want to do with a mortgage in 2018, it will be essential that we meet the following conditions at least for an entity to be willing to accept our request:
Sufficient savings of 35% of the value of the home, that is about 35,000 euros of each 100,000 mortgage. 20,000 euros will go to pay the part that the bank does not finance, and about 15,000 euros, to assume the management costs of opening a mortgage and taxes. We can only achieve a 100% financing in case of acquiring one of the floors of banks, homes that in the past have been foreclosed and that are now owned by the entities.
A stable and better job if it is in a booming sector. In addition, the minimum monthly income should be about 2,000 euros.
Do not borrow beyond the possibilities of each, that is, not allocate more than 35% of monthly income to pay the mortgage.
Do not appear in any ASNEF or RAI delinquent record and not have failed in any payment of any other loan.
Use the Help My Cash guide to get the best mortgage
The guide on how to request a loan prepared by the experts of Loans-n-Loans.com can be of great help for the negotiation of the loan. The guide contains 25 key questions to ask the entity before signing the contract. In this way, we will know exactly what we commit to before signing. In addition, in the guide, we will find tips to get a cheap mortgage.
These financial products are complex and contracting them involves a very high debt in the very long term. Therefore, the experts of HelpMyCash.com have developed this useful practical guide in which the following keys are given:
- What do the technicalities that banks use to describe their mortgages mean?
- What are all the dangerous or abusive clauses that we should avoid
- How can you calculate if you can afford the mortgage contract?