In recent years, real estate values have skyrocketed. And housing affordability has plummeted to near record low levels.
At the same time, more and more loans have been extended to borrowers with less than optimal credit histories – known as subprime borrowers. These loans often carry a higher interest rate and offer incentives that look good on the surface, but carry hidden costs.
These exotic mortgages – such as interest-only mortgages and adjustable-rate mortgages – often allow borrowers to exchange lower payments during an initial period for higher payments later. However, many subprime borrowers find themselves overextended and unable to afford the loan when the time comes for higher payments. This leads to foreclosure and bankruptcy.
The steep rise in foreclosures has led several large subprime lenders to file for bankruptcy or go out of business. And its impact has been felt by consumers and in financial markets around the world.