What is the sub-prime mortgage financial crisis of 2007?
The “collapse” of the sub-prime mortgage market refers to a sharp rise in home foreclosures in the United States that started in the fall of 2006 and became a global financial crisis within one short year.
How did this happen?
The root of the problem started with sub-prime mortgage loans, which were made to high-risk borrowers with lower income or less than stellar credit history. The share of subprime mortgages to total originations increased from 9% in 1996, to 20% in 2006. Further, loan incentives including “interest only” repayment terms and low initial teaser rates (which later reset to higher, floating rates) encouraged borrowers to assume mortgages believing they would be able to refinance at more favorable terms later.
While U.S. housing prices continued to increase during the 1996-2006 period, refinancing was available. However, once housing prices started to drop moderately in 2006-2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically. By October 2007, 16% of sub-prime loans with adjustable rate mortgages (ARM) were 90-days into default or in foreclosure proceedings, roughly triple the rate of 2005. Sub-prime ARMs only represent 6.8% of the loans outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007.
Is sub-prime lending all bad?
Sub-prime offers an opportunity for borrowers with a less than ideal credit record to gain access to credit. Borrowers may use this credit to purchase homes or finance other forms of spending such as purchasing a car, paying for living expenses, remodeling a home, or even paying down on a high interest credit card. However, due to the risk profile of the sub-prime borrower, this access to credit comes at the price of higher interest rates. On a more positive note, subprime lending (and mortgages in particular), provides a method of “credit repair.” If borrowers maintain a good payment record, they should be able to refinance back onto mainstream rates after a period of time. Credit repair usually takes at least twelve months to achieve.
I’m not even sure if I’ve been lied to by my broker or brokerage firm, what should I do?
The Morgan Keegan bond funds were heavily invested in subprime mortgages through Collateralized Mortgage Obligations (“CMO’s”). It appears that Morgan Keegan failed to disclose the risks associated with this over-concentration in subprime CMOs. In fact, the company marketed the bond funds as being able to produce high income with relatively low risk to investors. These representations were proved false by the sub-prime mortgage market collapse and now the Morgan Keegan bond funds have substantially fallen in value.
If you invested in the Morgan Keegan bond funds and suffered a financial loss, you may have a securities fraud claim. To find out if you have a securities fraud claim, please call or email the experienced securities fraud attorneys at Burke Harvey & Frankowski in Birmingham, Alabama. Regardless of where you live in the United States, we can help you recover the financial loss you’ve suffered through the sub-prime lending crisis of 2007. Please contact us today as there are statutes of limitation involved with securities fraud claims, and you don’t want to miss the cut-off date.
